Hedge funds that did best in 2022 could fare worst in 2023 – BNP


By Nell Mackenzie

LONDON (Reuters) – Trend following hedge funds that outperformed rivals in 2022 will likely underperform this year, according to investors surveyed by BNP Paribas in a report published this week.

The global survey of 185 investors in December and January also showed the investor community was undecided on putting money in hedge funds generally, given volatile markets.

China’s rapid reopening from COVID lockdowns, plunging European gas prices and cooling U.S. inflation have divided traders on whether the world economy can avoid a recession or whether sharp interest rate rises will eventually bite.

As world stocks tumbled 20% last year, commodity trading advisers (CTAs), or trend following hedge funds that try to follow markets up or down, returned a net 16%, second only to macro funds in strategies tracked by the BNP Paribas survey.


But investors polled by the bank did not believe the same would be true this year of such funds.

Of 13 kinds of hedge funds that might do well, including those that lost over 50% last year buying and selling stocks, CTAs were expected to come last this year, the report said.

Predicted 2023 best performing strategy https://www.reuters.com/graphics/GLOBAL-HEDGEFUNDS/lbvggljngvq/chart.png

The view reflects a broader flux among investors amid market uncertainty, whether over which hedge fund strategy they prefer or whether they want to redesign their portfolios entirely.

“People are at a crossroads on where to invest their money,” said Marlin Naidoo, global head of capital introductions at BNP Paribas.

“This often comes with a big market shift. We are seeing contradictory trends on this because investors are at different stages of this cycle,” added Naidoo, one of the survey editors.

Almost 30% of investors surveyed increased portfolio allocations to hedge funds in 2022, while more than 20% reduced them.

Many switched from hedge funds that trade stocks to those trading bonds. Going into 2023, around a quarter of those surveyed wanted to add bonds and private credit.

How much investors plan on putting in hedge funds https://www.reuters.com/graphics/GLOBAL-HEDGEFUNDS/zjpqjynkavx/chart.png

Overall, hedge funds perform better than most other asset classes in an environment of higher inflation and higher interest rates, said Naidoo.

    “Possibly this might be a catalyst for people to increase their portfolio allocation to hedge funds,” he said. 

(Reporting by Nell Mackenzie Editing by Dhara Ranasinghe and Mark Potter)