The Hedge Fund Scramble

The first quarter of 2025 wasn’t necessarily that interesting for equities and hedge funds, but the first quarter + April certainly was!

This is a brief note to highlight how YTD through April has impacted the hedge fund world, with what worked and why. A follow-up note will take a longer look under the hood and provide some updates on trend in the industry, both with respect to flows and fund structures.

The Market Backdrop

US equities (the S&P 500) were up decently through the end of February, buoyed by optimism that inflation was cooling and the Federal Reserve would soon begin cutting interest rates. S&P 500 gained approximately +6.8%, while the Nasdaq Composite surged nearly +8.9%, supported by investor enthusiasm for AI-driven tech and a resilient economic backdrop. Corporate earnings came in better than expected for Q4 2024, and job growth remained solid. These factors helped keep recession concerns at bay, while a belief in a “soft landing” scenario gained traction.

Things started to turn south in March, but for normal, fundamental reasons. Sentiment soured, with inflation data—particularly core CPI and PCE—showed persistent price pressures, especially in services. That data, combined with hawkish commentary from Federal Reserve officials, led markets to dial back expectations for rate cuts in the first half of the year. The Fed’s March policy meeting maintained a cautious stance, projecting only two rate cuts in 2025, down from three previously expected. Treasury yields spiked in response, with the 10-year yield rising above 4.4%, putting pressure on equities—especially in the tech and consumer discretionary sectors.

The S&P 500 gave back -3.1% in March, and the Nasdaq lost -4.5%, erasing a significant portion of the quarter's earlier gains. Still, the major indices managed to end the quarter in positive territory: S&P 500 up ~3.5%, Nasdaq up ~4.1%, and the Dow Jones Industrial Average up around +2.2% for Q1. Volatility spiked toward the end of the quarter, with the VIX (CBOE Volatility Index) rising above 20 for the first time since late 2024, reflecting growing investor uncertainty about monetary policy and inflation. Job growth was strong, with monthly job gains averaging above 200,000 which didn't help the inflation story. At the same time, long-duration assets and small-cap stocks underperformed, as tighter financial conditions and higher yields weighed more heavily on those segments.

Then we had “Liberation Day” on April 2 when the Trump Administration announced “reciprocal” tariffs, including 145% on China and 10% globally. The S&P 500 fell over -11% in the first eight days, entering bear market territory, while the Dow dropped over 1,600 points on April 3, and the Nasdaq also hit bear market levels. The VIX got above 52 by April 8th.

A recovery began mid-April after a 90-day tariff pause on April 9, leading to the S&P 500’s best day since 2008 and the Nasdaq’s best since 2001. Tariff exemptions and trade de-escalation signals further boosted markets, with the S&P 500 posting a nine-day winning streak. By April’s end, the S&P 500 was surprisingly only off -0.68% for the month, with the Dow and Nasdaq also down, but recovering some losses.

Year-to-date through April 30, 2025, the S&P 500 was down -4.77% and a little more than -9% off its all-time high seen in mid-February 2025.

There is a coda to this story, with what has happened thus far in May. This article, however, ends our story at the end of April.

Hedge Fund Performance

[All data I refer to below is from the HFRI indices from Hedge Fund Research, Inc. (HFR), through the end of April 2025. HFR founded in 1992, maintains some of the most robust and long-running aggregated performance reporting for global hedge fund performance. There are well over 100 indices, covering broad industry trends to specific sub-strategies and regional focuses. The HFRI indices are equal-weighted, net of fees (management and performance fees), and reflect the representative returns that institutional LP investors would earn from investments with the most prominent GPs.]

Hedge funds are supposed to be the ace in the hole when things go south. How’d they doing in 2025? In general, it’s not been as good as one might have hoped, with some notable players—both multi-strats and equity-focused funds—off for the first quarter, and April, too.

There have been very large divergences in returns this year, with the top performing long-volatility index returning over +9%, while systematic macro lost over -7%. Roughly half the HFRI strategies were positive through April, with the HFRI Fund Weighted Composite Index (perhaps the most representative index of single-manager performance) essentially unchanged, at -0.29% for the year—a small loss, but much better than the S&P 500.

What were the strategies that did the best? There were a number of niche strategies, particularly long-biased, geographic-specific strategies like EM or Japan. What else? Discretionary thematic macro (rather than systematic macro) was strongly positive. As was equity market neutral.  

But why?

What has caused some funds to disappoint, and are there certain factors this year we should look at to inform positioning? This note doesn’t look at crowded positions or Mag 7  overweight. Rather, there are a few market indicators and unique aspects of this past April that are informative and should be considered for positioning moving forward.

What accounts for some macro funds being the worst performers, while others (discretionary strategies) were among the best?

Discretionary macro strategies rely on human judgment, with portfolio managers using qualitative analysis and intuition to interpret macroeconomic trends and make investment decisions. Managers can flexibly adapt to new information, taking opportunistic or contrarian positions based on their insights into events like geopolitical shifts or policy changes. In contrast, systematic macro strategies use predefined quantitative models and algorithms to identify trading signals from historical and real-time data. These rules-based approaches ensure consistency and reduce emotional bias but are less adaptable to unexpected events, as they depend on patterns, and are heavily influenced by momentum.

In April, the rapid market swings, driven by Trump’s tariff policy and its sudden 90-day pause on April 9, favored managers who could quickly interpret and act on qualitative signals, such as policy reversals, to capture the recovery rally. Systematic models loaded on strong trends, couldn’t capture the unprecedented tariff shock and abrupt recovery, as they rely on historical patterns that might not account for such policy-driven volatility. As a result, systematic managers lost over -4% for the month, while discretionary managers gained nearly 2%.

Why’d market neutral do well? Somewhat different, but complementary reasons. Simply put, April 2025 was one of the best environments for long-short (or market neutral strategies) we’ve seen in ages. As noted, VIX was high, but historically market-neutral funds don’t have a high correlation with VIX (although they may with lagged changes in VIX or higher levels of VIX.) Rather, arguably the biggest driver of strong April returns (and strong YTD returns) for these strategies is recently high dispersion.

The Cboe Dispersion Index (DSPX), which has been in the low 30s over the past year, with a fairly tight standard deviation, climbed over 46 in April, which is basically 4 standard deviations above its mean.

The DSPX is similar to VIX, in that it uses options to calculated implied or forward-looking dispersion. It reflects the market’s perception of how differently S&P 500 stocks are expected to perform relative to each other, indicating opportunities for diversification or the intensity of idiosyncratic (company-specific) risk. Higher DSPX levels suggest greater expected variation in stock returns.

For strategies like market-neutral, those are exactly the conditions you are looking for. And since DSPX is somewhat forward-looking, it could be a type of leading or at least contemporaneous indicator, for when a dynamic allocator might like to be more hedged than long-only. Of course, for most investors, that sort of nimbleness is harder to achieve intra-month unless you have access to a strategy that allows for daily liquidity.

The Bottom Line

The April 2025 market turmoil, driven by tariffs and a swift recovery, produced wildly divergent hedge fund outcomes. Discretionary macro strategies excelled by adapting to policy-driven swings, while systematic macro lagged, whipsawed as their models loaded heavily on momentum. Market-neutral strategies, buoyed by a DSPX spike to 46, capitalized on elevated stock dispersion, delivering robust returns. These divergences highlight the need for strategic flexibility and dispersion awareness in volatile markets, offering lessons for positioning as 2025 progresses.