Whether they’re biased to the long side or the short side, conditions can change fast in a market where making money is highly challenging for most traders. Some of these conditions can be expected while others come as complete surprises. Most of the time, volatility is good. But not too much volatility.

It’s much easier to make money when you can trade with the trend for years; or at least weeks. The good news is that there are people out there making money. The list below consists of the three top-performing hedge fund strategies for 2020 and the three worst performers. That doesn’t mean the hedge funds using these strategies will perform as well (or as badly) tomorrow. 

The real key to this list is to see which hedge funds in any category have consistently delivered a positive return over the years yet still deliver in 2020's challenging environment.

If a hedge fund can deliver regardless of what the market is doing, then it is in the true sense of the phrase, a “hedge fund.” It’s also a hedge fund you might want to consider investing in.

Hedge funds are supposed to excel in challenging times; however, in the last few years, hedge funds have not performed as spectacularly as from many years ago, often having a difficult time outperforming the market.

Prior to looking at that list, let’s see what these hedge funds are up against.

Key Takeaways

  • Hedge funds are meant to return alpha; returns that are significantly higher than those of the market.
  • Different hedge funds employ different investment strategies, all of which will react differently in different market environments.
  • It is important to choose hedge funds whose strategies can handle multiple environments or that the fund's returns have shown the ability to positively perform in all environments.

Economic Headwinds

If you’re thinking of investing with a hedge fund, or any fund, then you might want to consider all the factors. The only funds that will be capable of navigating such a difficult market are those that are hedged, knowledgeable, experienced, and disciplined. Here are a few factors impacting hedge fund strategies:

  • Record global debt
  • Overbuilt and overleveraged China (world’s second-biggest economy)
  • Geopolitical tensions
  • Cost-cutting culture for large-caps (hurts consumer spending)
  • Population declines in Europe, the U.S., China, and Japan (hurts consumer spending)
  • Student loan crisis
  • Sky-high healthcare costs (hurts consumer spending)

Top Hedge Fund Strategies 2020

The following is from Aurum, an investment manager that selects hedge funds for investment purposes.

The top three performing strategies year to date, as of Nov. 5, 2020:

  1. Multi-Strategy: +9.69%
  2. Equity Long/Short: +6.04%
  3. Event-Driven: +2.67%

Worst Hedge Fund Strategies 2020

Here are this year's worst-performing hedge fund strategies as of Nov. 5, 2020:

  1. Quantitative: -9.16%
  2. Credit: -2.96%
  3. Volatility Arbitrage: -0.82%

The Bottom Line

Investing and achieving positive returns is a difficult task, one that hedge fund managers are meant to excel at. Markets are constantly moving and changing and certain hedge fund strategies will perform better or worse depending on the market environment.

When selecting a hedge fund to invest in, you want to make sure it can handle multiple market environments. The best way to do this is to look at a long history of the fund's returns but only if those returns are all from the same manager.