US Stock Market: Healthcare, momentum bets power hedge funds to strong H1 returns

Hedge funds focused on equities ended the first half of the year with strong double-digit returns, aided by their ability to navigate crowded trades and capitalize on sector-specific opportunities, according to a Goldman Sachs client note,as per a report by Reuters.

Stock-picking hedge funds generated a 4% return in June. Funds that rely on fundamental analysis to evaluate companies delivered an 18.4% gain during the second quarter, marking their strongest quarterly performance in Goldman's records. Their year-to-date return stood at 17.4%.

The Goldman note indicated that larger portfolio positions, exposure to the healthcare sector, and participation in momentum-driven trades were among the key contributors to performance.


However, heightened market volatility in June weighed on returns in some areas. Losses were linked to trading in South Korean equities and short positions that bet on declines in asset prices.

The broader market backdrop was mixed. While the U.S. semiconductor index posted its best quarterly performance on record, technology megacaps lost momentum during June. The Roundhill Magnificent Seven ETF fell 9% during the month, its steepest monthly decline in more than a year.

Oil prices have retreated to levels seen before the Iran conflict, while financial markets continue to expect at least one U.S. Federal Reserve interest rate hike before the end of the year, despite softer-than-expected U.S. jobs data reducing expectations of more aggressive tightening.

Systematic hedge funds, which rely on quantitative models to identify trading opportunities, gained 1.1% in June after late-month losses, according to Goldman. Their year-to-date return reached 11.3%.

A separate note from systematic hedge fund Winton, cited by Reuters, said quantitative managers were hurt by volatility in large U.S. technology stocks and Chinese equities. Short positions in fixed-income markets, particularly long-dated U.S. Treasuries, also weighed on performance.

Across multi-asset strategies, including trend-following and commodity trading advisors, gains from positions in the Canadian dollar and Japanese yen were more than offset by losses in the Australian dollar, British pound and Norwegian krone, according to Winton.

The Winton note added that faster systematic trading strategies adapted more effectively to volatile market conditions because they were able to adjust positions more quickly than longer-term models.