Hedge funds slip in September on rates, oil and AI swings

Goldman Sachs Prime Services reported the average hedge fund declined 0.55% in September. Systematic equity long-short strategies gained 3.46% while the MSCI World Index fell 1.3%.

During the month the Federal Reserve raised interest rates for the first time since 2023 and signalled further increases could follow. US Treasury yields reached levels not seen in roughly two decades, increasing borrowing costs for market participants.

Oil prices rose amid tensions involving Iran, adding to inflation pressures and affecting energy and commodity markets.

Sharp swings in technology stocks tied to questions about the sustainability of AI spending produced large price moves in the United States and South Korea. That volatility hit fundamental equity long-short funds: Goldman Sachs data showed the average fundamental long-short fund lost 0.55% in September, still outperforming the MSCI World Index. Computer-driven systematic equity long-short funds recorded a 3.46% gain, their strongest monthly return this year.

Trading flows were tilted toward selling across most US equity sectors. Within technology, electronic equipment and hardware experienced net selling while semiconductor equipment and software attracted net buying. Concentrated ownership of many AI-related names magnified price movements and affected managers holding crowded positions.

Regional performance varied. Morgan Stanley estimated Asian hedge funds fell about 0.6% through Sept. 25, compared with a 0.2% drop globally over the same period, as economic uncertainty in the region pressured returns.

Certain managers benefited from moves in commodities and rates. The Société Générale Trend Index rose more than 4% in September, helped by short fixed-income positions and long exposure to energy markets, according to Winton Group.

The higher interest-rate environment changed funding costs and outcomes across strategies. Funds that rely on leverage or short-term financing faced higher expenses, while trend-following and commodity-focused approaches recorded gains where there were clear moves in rates and energy.

Hedge funds employ a range of approaches, including fundamental stock selection, quantitative models and trend-following techniques. Fundamental long-short managers pair long and short equity positions based on company research, systematic funds use algorithms and data to generate trades, and trend-following strategies seek profits from sustained price moves in assets such as bonds, currencies and commodities.