2024 Midyear Outlook: Hedge Funds

The first half of 2024 has mirrored the strong performance seen in 2023, with equity markets driven primarily by a few technology stocks while central bank policy remains uncertain and geopolitical unpredictability has increased volatility. Despite these challenges, there is a notable resurgence in asset price dispersion, creating favorable alpha opportunities for hedge funds. Stock prices are increasingly influenced by fundamentals, as evidenced by a remarkable decrease in short interest. In credit markets, there's progress in addressing a significant maturity wall, though tight spreads may constrain potential upside.

Divergence among global central bank policies is anticipated to bolster country-specific investment strategies, amidst political uncertainties present in developed and emerging economies. The environment favors long/short equity strategies, particularly those focused on security selection, with a preference for market neutral approaches. Quantitative equity strategies, particularly mid-frequency ones, may have enhanced prospects due to current stock-picking conditions. In credit markets, low-beta relative value strategies are preferred, although returns may be limited in the short term due to existing low volatility. Discretionary macro strategies are favored over systematic approaches, as evolving political and fiscal landscapes offer expanding opportunity sets. Overall, the current market dynamics are expected to sustain increased alpha opportunities for hedge funds throughout the year.