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Wall Street has become entrenched in a battle for stability as unexpected labor market data prompted widespread volatility in early August 2024.
While the Federal Reserve’s combative monetary policy shifts have come under the spotlight, hedge funds could become a leading beneficiary under the heightened uncertainty.
The odds of a second major 50-basis point rate cut by the Fed at its November meeting have climbed to 57.4% in recent days, pushing more institutions on red alert for upcoming market volatility.
Whether the highly dovish policy will lead to a soft landing or recession is the subject of much speculation, but this hasn’t stopped hedge funds from undergoing a prosperous August despite historically high peaks on the Cboe’ Vix volatility index.
Early August saw the S&P 500 tumble seven percent off the back of lower-than-expected labor market data, pushing the Vix 65% higher in its highest jump for more than six years.
With an intraday peak of 180%, the index briefly reached a high that hadn’t been seen for at least 20 years.
With the added uncertainty of the wider geopolitical landscape and the prospect of a close-run US presidential election, more traders are becoming wary over the potential of a more volatile second half to 2024.
As a result, hedge funds are braced for a third and fourth quarter that’s packed with opportunities and risk as Wall Street embraces an unpredictable end to the year.
Hedge funds thrive on uncertainty
After finding themselves “increasingly exposed” to market turbulence at the beginning of August, many hedge funds successfully navigated the period of high volatility by posting modest gains after the month.
Backed by the strong performance in equity hedge and fixed income-based relative value arbitrage strategies, the HFRI Fund Weighted Composite Index closed 0.25% higher for August.
Likewise, the new HFRI Multi-Manager Index rallied 1.6% over the month.
This fund focuses on utilizing a multi-manager structure where capital is allocated to independent investment teams that operate under its specified guidelines.
Healthcare and even technology-focused funds grew in August, closing the month 2.9% and 2.2% higher respectively.
Despite the impressive performance of hedge funds in August, Mandy Xu, head of derivatives market intelligence at Cboe Global Markets, suggests that there’s a lot of sensitivity among investors in response to the heightened volatility…
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