The fund aims to closely track the performance of the HFRI 500 Index, a leading global investable hedge fund benchmark comprising hundreds of hedge funds across multiple investment styles, including Equity Hedge, Event Driven, Macro and Relative Value strategies.
By replicating the index through direct investments in its constituent funds, the abrdn Eclipse HFRI 500 fund offers true hedge fund benchmark returns in an efficient and cost-effective manner.
2024, a recap
The year 2024 was marked by significant turbulence in financial markets, driven by a combination of monetary policy shifts, geopolitical uncertainties, and evolving economic conditions. Despite these challenges, equities delivered strong returns, particularly in the technology and healthcare sectors, while bond markets benefited from declining interest rates.
Against this backdrop, the abrdn Eclipse HFRI 500 fund had an annualized return of 6.49% and annualized volatility of 3.73%, realizing a risk-adjusted return of 1.74 and outperforming the traditional 60/40 equities-bonds portfolio, which had a risk-adjusted return of 1.28 (Chart 1).
Chart 1. Risk-adjusted return: abrdn Eclipse HFRI 500 vs. Traditional 60/40 customized index
This outperformance highlights the fund’s effectiveness in diversification through exposure to a vast amount of robust investment strategies, enabling enhanced returns relative to the risk undertaken.
Key performance drivers
The fund’s strongest performance was recorded in February and March, with Systematic Macro managers recording impressive gains. During these months, managers seized the opportunity presented by rising equity markets and higher commodity prices. One standout fund in the hedge fund benchmark achieved remarkable success in the first quarter of 2024, recording a return of +124%.
August and October were the fund's weakest months. In August, global markets experienced a sharp sell-off triggered by the unwinding of the Yen FX carry trade. This deleveraging led to a dramatic decline in Japan's Nikkei, which fell over 20% in just three days. The impact was widespread, with the S&P 500 Index also dropping more than 5%. However, the recovery was swift, with most of the losses regained within the same month. Trend-following funds within the Systematic Macro managers faced their worst month of the year, as the sharp reversal created an unfavourable environment for the strategy.
US equities were bolstered by the growth of the Magnificent 7 in the last quarter of the year, driven by the ongoing AI boom. However, outside of the Magnificent 7, US equities faced pressure due to rising macroeconomic uncertainty, weak economic data, and the US presidential election. October was one of the weakest months for Long/Short Equity managers. Despite this, their positive beta to the equity market resulted in a robust contribution to the overall benchmark return for the year (Chart 2).
Chart 2. Hedge funds’ investment sub-strategies S&P 500 net returns
A look into the hedge fund benchmark
When examining the distribution of returns within the hedge fund universe, an intriguing observation emerges: the presence of large outliers and high kurtosis starkly contrasts with the common simplification assumption of a normal distribution. In fact, extreme outcomes are amplified due to common practices in hedge funds, such as leverage, short-selling, and the use of derivatives.
In 2024, we saw a positive skewness and large tails on both the positive and negative sides in hedge fund returns. A wide return dispersion, coupled with the deep and complex investment approaches that exist in the hedge fund space, defy the confines of a Gaussian model and make selecting the right hedge fund challenging (Chart 3).
Chart 3. Performance distribution of sub-funds, year-to-date
Interestingly, over the year, 5% of funds within the hedge fund universe were liquidated. Many of these closures came from Systematic Macro and Long/Short Equity strategies, largely reflecting the higher overall representation of these strategies within hedge funds.
Fund performance by various categories
When analyzing the constituent fund performance by assets under management (AUM), it was revealed that there was little variation in median return across AUM brackets (Chart 4).
Chart 4. Performance distribution of sub-funds by AUM, year to date
However, when analysing trends within each individual sub-strategy, it was notable that within the Systematic Macro sub-strategy, funds within the $100 million to $250 million range recorded significantly higher median returns than the larger funds (Chart 5).
Chart 5. Performance distribution of sub-funds by AUM, year to date, Systematic Macro SP
Further categorising the constituent funds by management fee showed that investors didn’t benefit from paying lower management fees in 2024. Funds with lower fees, between 0% and 1%, had a lower median net return than those with higher fees (Chart 6).
Chart 6. Performance distribution of sub-funds by management fee, year to date, across all SPs
However, the return dispersion within the lower fee funds was higher, indicating greater variability. This underscores the importance of a skilled hedge fund selector to succeed in a space where many hedge fund managers' fees are being compressed.
Hedge fund outlook
Coming into 2025, the outlook for risk assets appeared generally benign with equities supported by modest global growth and particularly positive expectations for the US. The view also included central banks around the world continuing to ease monetary policy. Fast forward by a few months and the outlook has changed materially. The recent risk-off environment started with the announcement from DeepSeek which called into question the AI Revolution theme that had been driving markets, but it quickly shifted to heightened uncertainty surrounding the back-and-forth tariff policy from the new US administration. The crescendo was the April 2nd “Liberation Day” announcement of an aggressive US tariff stance that exceeded even the largest estimates. Market volatility ensued and historical correlations broke down, wreaking havoc on investors’ portfolios.
We’ve seen mixed returns from hedge fund strategies over this volatile period, although most have provided diversification and exhibited a downside buffer relative to equity markets. Some strategies have delivered the expected uncorrelated returns, effectively navigating the challenging conditions to achieve positive performance – notably the Multi-Strategy funds (the quantitative components of these portfolios have outperformed their more fundamentally driven long/short equity allocations), structured credit funds (profiting from higher real yields) and relative value volatility funds with their net long volatility/convexity profile – while some have found the combination of trend reversals and a larger breakdown in historical correlations more challenging.
Manager reactions to April’s seismic events have also varied. Although a large number came into April having significantly reduced their leverage levels, de-grossing and risk-cutting continued over much of early-April. However, in recent days there is evidence of managers gradually putting capital back to work again, with shorts being covered as signs of a trade war de-escalation start to emerge and market technicals improve. This risk reduction process is one of the key advantages of the hedge fund model, i.e. raising dry-powder into an environment that will likely create attractive buying opportunities in the future.
Nevertheless, the overwhelming theme right now remains caution; with managers watching carefully for signs of recession, stagflation, or a renewed escalation in the trade war. The outlook over the coming months is uncertain – and with uncertainty comes elevated volatility – so hedge funds may well see renewed focus this year. Hedge fund strategies have historically demonstrated an effective ability to steer their way through choppier markets while providing diversification and a defensive play without compromising on return. The unique ability of these strategies to position themselves long and short a given asset represents a particular advantage during volatile markets. Combined with ‘best-in-class’ risk management, the superior alpha generative capabilities of hedge funds is highlighted in periods such as this.
We remain constructive on hedge funds and continue to favor those strategies that can take advantage of the opportunities provided in this environment and increased cross-country volatility, especially in the Macro and Relative Value space.
IMPORTANT INFORMATION
Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.
Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.
Hedge funds use sophisticated investment strategies that may increase investment risk in your portfolio. Among the risks presented by hedge fund investments are: the use of unregistered investments, which may make it difficult to assess the performance of the holding; risky investment strategies, which may result in significant losses; illiquid investments that may be subject to restrictions on transferability and resale; and adverse tax consequences.
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