Hedge funds hit their highest level since 2020

Hedge funds posted their best monthly performance since 2020, thanks to gains made by their managers from the sharp rally in shares of technology companies such as Intel, Alphabet, and AMD. A global hedge fund index compiled by the data firm HFR rose 5 percent in April, the largest increase since November 2020, according to preliminary figures. These gains were driven by technology-focused instruments, which surged 14 percent during the month. "It's a story of very solid performance across all strategies," said Jon Feeney, co-chief investment officer at Investcorp-Tages, which allocates investors' capital to hedge funds.Feeney highlighted strong corporate earnings, continued investment by so-called tech "hyperscalers," and "frankly exuberant behavior in memory stocks," adding that his firm's client portfolios "had one of their best months in more than 10 years."The S&P 500 index of leading U.S. stocks surged 10.4 percent last month, its biggest monthly gain since the COVID vaccine rollout in November 2020, helped by a ceasefire in the war with Iran and strong earnings. The Nasdaq rose 15.3 percent, its best month since April 2020. Alphabet rose by about a third last month, bringing its market capitalization to around $4.7 trillion, helped by strong cloud growth, while chip companies also posted huge gains. Intel more than doubled in value, while AMD soared 74 percent. SanDisk, which specializes in memory chips, rose 73 percent and has gained about 412 percent so far this year.Hedge funds' net leverage, a measure of their debt, rose in April as managers bought more shares than they sold, according to a note from Goldman Sachs' primary brokerage division, which provides loans to hedge funds.Eddie Fishman, managing director of the DE Shaw hedge fund, highlighted the gains of some of the largest companies, including several megacap technology stocks known as the "Magnificent Seven." "At the end of the day, it's not just that stocks are rising in proportion to their size, but rather some of the largest and most liquid companies," he said at the Milken conference in Beverly Hills.Marshall Wace's Eureka fund, with $23 billion in assets and a long-short equity investment strategy, rose 7 percent, bringing its year-to-date gains to 7.9 percent, according to a source familiar with the figures.Dmitry Balyasny's Balyasny Asset Management saw its flagship multi-manager Atlas fund, which has traditionally had a heavy weighting in equities, gain 3.1 percent during the month, although it is still down 0.8 percent year-to-date.The multi-manager hedge fund giant Millennium rose 2.7 percent in April and 3.6 percent year-to-date, while Citadel gained 1.4 percent in April with its flagship Wellington fund, bringing its annual return to 2.4 percent.The gains represent a dramatic recovery from March, when the sector suffered some of its worst losses since the start of the pandemic. Funds that had anticipated interest rate cuts this year were among the hardest hit by the outbreak of war in the Middle East, as markets shifted course dramatically to begin pricing in rate hikes to counter the expected inflationary spike. Macro hedge funds, which invest in bonds, currencies, and other assets, lost nearly 2 percent in March, according to HFR, though they rebounded 1.6 percent last month. A hedge fund manager said the losses led investors to question the sector's correlation with capital markets and the risk that funds could get caught in highly concentrated trades. "In March, everyone was betting on rising interest rates, the yield curve, and a falling dollar," he said. "They were surprised that, no matter how diversified their portfolios were, many were correlated." Historically, hedge funds have a strong correlation with capital markets. This is due, in part, to the fact that while many equity managers maintain a mix of long and short positions, they typically hold more of the former. The recent relative stability of the markets helped hedge funds that borrow heavily from banks to maximize their returns, including multi-manager hedge funds such as Ken Griffin's Citadel, Izzy Englander's Millennium, and others. The VIX volatility index--known as the market's "fear gauge"--fell from around 25 to less than 17 during the month, below its long-term average.High volatility--such as that seen during U.S. President Donald Trump's trade war early last year, when the VIX spiked, or following the outbreak of the war with Iran this year--can force highly leveraged investors to rapidly reduce their risk levels, which can hurt their returns.