When stocks fall, bond prices rise. Or at least that’s what’s supposed to happen. These days, most asset classes appear to be falling simultaneously. The S & P 500 has fallen by about 8% over the past month, while U.S. Treasury yields have continued to push higher (with prices heading lower). Amid this environment, hedge funds have broadly outperformed and are “well placed to navigate current market volatility,” according to a new report by UBS. Research by the Swiss investment bank shows that hedge funds gained 0.4% in August while global stocks declined by more than 4%. Hedge funds are alternative investments that employ a wide range of strategies, including betting on falling markets. Many also utilise leverage to maximise returns. Such investments were previously restricted to a select group of investors, but are now wisely accessible through ETFs. The UBS report also showed that the hedge fund performance tracker, the HFRI Fund Weighted Index, had fallen by just 4% this year until August, as the MSCI World Index declined by 15.6% over the same period. The chart below shows how hedge funds have consistently beaten broader equity indexes this year. For example, despite a more-than 8% fall in the MSCI World Index in April and June, hedge funds returned 2.3% and -0.7% for the two respective months. The bank’s note to clients said most hedge fund strategies had outperformed thanks to political risks, macro issues and monetary policy weighing on markets. “Certain hedge fund strategies can perform well in volatile and sideways-moving markets, an environment we expect to last into next year,” the report said. This year has seen recession risks increase as central banks have turned more hawkish over inflation. In such a scenario, UBS said it prefers hedge funds that offer “macro strategies” that can trade on volatile markets. “These funds can invest in a much wider range of underlying [securities] including commodities and foreign exchange, as well as bonds and equities,” the report said. “Multi-strategy funds are also attractive because they offer access to multiple sources of alpha and can swiftly reallocate their capital to the most attractive opportunities as they evolve.” Can bonds make a comeback? While bond prices are falling alongside stocks right now, UBS expects that relationship to reverse back to normality soon. The report said that since 1930, bond prices had rallied after 12 months of negative returns for both stocks and bonds. Bonds have returned 11% on average every time.
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