A revived quarter for hedge funds

Why investors study Treasury auctions. # # --------------------------------------------------------------- The key takeaways today: - US hedge funds marked their best quarter in four years - Why markets and investors are keenly watching Treasury bond auctions - Europe's half-trillion-euro dividend and buyback bonanza - The 25th anniversary of Goldman Sachs' IPO - Sustainability is a $3 trillion-plus opportunity - Briefings Brainteaser: How many people will be taking GLP-1 anti-obesity drugs by 2028? Was this newsletter forwarded to you? [Sign up now](. --------------------------------------------------------------- Hedge funds had their best quarter since the winter of 2020 As markets rose in the first quarter of 2024, US hedge funds posted their best performance since the fourth quarter of 2020, returning 5.2%, according to Prime Services in Goldman Sachs' Global Banking & Markets. Hedge funds' performance lagged only slightly behind that of a template 60/40 equity/bond portfolio, which returned 5.6%. The strong quarter was driven by equity long/short as well as event-driven strategies, both of which continued their form from the previous quarter. Other approaches, such as quantitative strategies and managed futures, rebounded. Continuing the trend of 2023, growth-oriented strategies in sectors like healthcare and technology outperformed in the quarter, while financials strategies also saw strong returns. Even so, hedge funds continue to find it challenging to raise assets, with most strategies witnessing net outflows of funds in the first quarter of 2024. For generalist equity strategies, this marked the eighth straight quarter of outflows. This may be a result of performance challenges in equity long/short in 2021 and 2022 but also reflects a difficult asset-raising environment for hedge fund strategies broadly. --------------------------------------------------------------- Why Treasury auctions — and rising deficits — are becoming a focal point for markets and investors Markets and investors are increasingly scrutinizing the size and results of US Treasury bond auctions for signs that weakening demand will trigger higher yields. In turn, that would raise the cost of government borrowing and ultimately hurt the economy. Not only has the size of Treasury auctions increased, but there are also signs of weakening demand. “We've seen these very, very large amounts having to clear through the market. And as a function of that, there's more attention…on how these auctions are faring,” says Jonny Fine, Global Head of Investment Grade in Global Banking & Markets, [on Goldman Sachs Exchanges](. The main concern is whether there's enough demand to satisfy the increased supply, he says. Jonny Fine (L), Global Head of Investment Grade in Global Banking & Markets, and Allison Nathan of Goldman Sachs Research Debt levels have jumped sharply, but government officials and policymakers don't appear to be particularly concerned, notes Alec Phillips, chief US political economist in Goldman Sachs Research. “Part of it is that we've now been through this a couple of times” and the economy still continues to “muddle along,” he says. Today there's generally little political emphasis on fiscal restraint, even among the candidates running in the US presidential election, he adds. --------------------------------------------------------------- In Europe, dividends and buybacks are poised to reach an all-time high Companies in Europe's STOXX 600 index are expected to return more than half a trillion euros to shareholders via dividends and buybacks, a record high, according to Goldman Sachs Research. “Dividends will remain the main source of return, but buybacks are growing,” Guillaume Jaisson writes in his team's report. The shareholder bonanza is expected, in part, because of the €1.5 trillion in cash that STOXX 600 companies have on their balance sheets, up 35% compared to pre-pandemic levels. The cash-to-asset ratio of these companies is above the 2005 level, which preceded a major boom not only in capital expenditure but also on mergers and acquisitions and stock buybacks. In recent years, the major buyers of European equities have been corporations, via share buybacks — so much so that buybacks now comprise 35% of total shareholder return, up from a historical level of 20-25%. The combination of buybacks and a lack of new issuance has meant that the net supply of public equity is shrinking at its fastest pace in history. The universe of European public equities has already shrunk by a net €170 billion over the last 12 months. Corporate balance sheets “do not look especially stretched,” writes Jaisson, who adds that the level of net debt to EBITDA is close to an all-time low. Free cash flow yield is around 6% in Europe, more than a percentage point higher than in the US. The expected yield would make the STOXX 600 a reasonable alternative to 10-year US Treasuries and the S&P 500, Goldman Sachs Research finds. “In other words, European equities have rarely looked cheaper on an absolute and relative basis,” Jaisson writes. --------------------------------------------------------------- Commemorating the 25th anniversary of our IPO May 4, 2024, marks Goldman Sachs' 25th anniversary as a public company. Goldman Sachs' IPO in 1999 was, at the time, one of the largest public offerings ever among financial services companies. [Read more about]( Goldman Sachs' listing on the New York Stock Exchange --------------------------------------------------------------- The $3 trillion-plus annual sustainability opportunity Goldman Sachs has been helping clients and partners with their sustainability objectives for more than two decades, and the challenges remain formidable, according to the firm's 2023 [sustainability report](. More than 80% of the world's energy needs are met by fossil fuels, and the demand for energy is rising. Geopolitical conflicts have underscored the need for affordable and reliable energy. Higher levels of inflation have made decarbonization more difficult, raising the costs of new technologies. Electricity consumption from data centers, generative AI, and cryptocurrencies could double by 2026, compared with 2022 levels. At the same time, new sources of energy are ramping up: Renewable energy capacity additions around the world grew by almost 50% last year to a record high. In the report, titled “[Driving Long-term Value: Our Client-Centric Sustainability Strategy,]( David Solomon, Goldman Sachs' chairman and CEO, writes that energy security and carbon reduction go hand in hand. “We will continue to finance and advise our clients in the energy sector, and we will also invest in innovative decarbonization technologies that can accelerate the transition,” he writes. “We need to do both.” Sustainability requires a substantial amount of capital. In 2019, Goldman Sachs announced a 10-year $750 billion commitment to support client demands for sustainable finance solutions across the firm's financing, investing, and advisory activities. As of 2023, the firm has supported approximately $555 billion in commercial activity, achieving roughly three-fourths of its goal in just four years. The International Monetary Fund, meanwhile, estimates that around $3 trillion to $6 trillion is needed each year through 2050 for mitigation and adaptation financing. Goldman Sachs has been working with clients and partners to develop innovative blended finance structures to bring more commercial capital into projects that contribute to sustainable development. “There's plenty of work ahead, and we're ready for the challenge,” Solomon writes. Read [our Q-and-A with Kara Succoso Mangone]( head of Goldman Sachs' Sustainable Finance Group, and [access the full sustainability report here](. --------------------------------------------------------------- Briefings Brainteaser: Market studies Goldman Sachs Research analyzed more than 20 ongoing GLP-1 studies to estimate how their successes would affect the potential use of these anti-obesity drugs. In the most promising scenario, approximately how many people in the US would be taking GLP-1s by 2028? A) 10 million B) 70 million C) 120 million D) 170 million [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news By clicking on these links, you will redirected to external websites that Goldman Sachs does not own or operate. Goldman Sachs is not responsible for the products, services, or content provided on those sites. Please refer to each external website's terms, privacy and security policies for details. [CNBC]( April 24 The market wants certainty more than cuts, says Goldman Sachs' Elizabeth Burton (5:49) [Bloomberg]( April 24 US-Europe valuation gap will not close, Goldman Sachs says (2:02) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. 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