February 2025 presented a challenging environment for hedge funds, as heightened market volatility led to significant de-risking. Many managers unwound positions at the fastest rate in over two years, with activity comparable to past periods of market stress. The month saw mixed performance across strategies, with some funds capitalizing on volatility while others struggled.
Overall industry performance
- The hedge fund industry posted a modest decline in February, with inter-strategy dispersion remaining relatively low.
- Equity long/short strategies were among the weakest performers, while arbitrage and event-driven strategies saw the strongest gains.
- Some macro-focused funds managed to generate positive returns of up to 2.3%, while others faced losses due to unexpected economic shifts.
Strategy-specific performance
- Equity Long/Short Funds saw losses as market declines erased roughly half of their year-to-date gains. U.S.-based stock-picking funds finished the month down 1.4% on a single trading day, taking their total year-to-date performance into negative territory.
- Systematic Strategies showed mixed results, with some gaining up to 3.2%, while others experienced declines due to shifting macroeconomic trends.
- Multi-Strategy Funds had varied performance, with some ending February down 1.3%, while others recorded modest gains, bringing their year-to-date returns to approximately 3.5%.
Market trends and investor sentiment
- Hedge funds reduced exposure across multiple asset classes, particularly in highly concentrated trades, in a trend reminiscent of the market volatility seen in early 2020.
- A major brokerage firm noted that single-stock sales in February were the highest in over two years, signaling a significant shift toward risk reduction.
- Equity leverage remained elevated, reported at 2.9 times portfolio value, the highest level in the past five years, raising concerns about potential further de-risking.
Despite February’s challenges, hedge funds continue to navigate a complex landscape, with some benefiting from volatility while others reassess their positioning. Investor sentiment remains cautious, with reports indicating that nearly one in four investors is considering reallocating capital due to concerns over performance, risk exposure, and fund size. The coming months will be critical in determining whether funds can adapt successfully to evolving market conditions.
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