 The bond market sell-off that followed the Federal Reserve’s 16 September rate hike deepened over the second half of the month. The 10-year Treasury yield rose above 5.2% by 29 September, its highest since mid-2007, having gained close to 50bps over the month and more than a full percentage point over the year. The 30-year yield reached its highest level since 2004, while the 2-year held near 4.7%. The rate rise to a 3.75% to 4.00% range on 16 September, the first increase since 2023, was delivered in a unanimous vote alongside projections pointing to further tightening, and Chair Kevin Warsh attributed the move in long-dated yields to economic strength, competition for capital and geopolitical factors rather than inflation alone. As shown in Graph 1, the repricing of the curve through 2026 has taken yields to levels not seen in close to two decades.
 The Federal Reserve raised its benchmark rate to a range of 3.75% to 4.00% on 16 September, its first increase since 2023, in a unanimous 12-0 vote. The move followed the hawkish turn in policy under Chair Kevin Warsh, with persistently elevated inflation, driven by higher energy costs tied to the Iran conflict, tariff pass-through and the AI build-out, outweighing growth concerns. The accompanying projections point to a further increase before year-end, with sixteen of eighteen participants anticipating at least one more hike, and futures markets pricing the funds rate near 4.1% by December. The reaction in bonds was sharp: the 10-year Treasury yield reached 5.0%, up roughly a full percentage point from its February low, while the 2-year climbed toward 4.7%. As shown in Graph 1, the curve has repriced through 2026 from expecting cuts to a sustained tightening path.
 July marked the first monthly decline of the year for hedge funds, partly reversing a strong first half. The HFRI Fund Weighted Composite fell 1.1% in the month, leaving it up 6.25% YTD, with only around 45% of funds posting positive returns. The decline was led by the strategies that had driven the first-half rally: the HFRI Technology Index dropped 7.0%, its steepest monthly fall since 2008, as the AI-related momentum that had powered technology-focused managers through the first half reversed sharply. Relative value was the only major group to gain, up 0.24% for the month and 3.99% YTD, as fixed income and rate-sensitive strategies benefited from the move in yields. Overall we believe it illustrates the ill effect of the concentration of the industry’s first-half gain, and how quickly a shift in AI sentiment can ripple through performance.
The hedge fund industry recorded its strongest first half in five years. The HFRI Fund Weighted Composite gained 7.6% over H1 2026, having advanced 6.55% in Q2, the best quarter for the industry since Q4 2020. Industry capital reached a record $5.6tn at the end of June following a $409.3bn increase over the second quarter, the largest quarterly rise on record and the fifteenth consecutive quarterly expansion. Our mandated funds returned 0.37% across the SMC Cross-Asset Index over the same period, with assets across our mandates at $48.8bn at the end of June. Dispersion across strategies was wide. As shown in Graph 1, our equity composite returned 9.79% against 8.67% for its benchmark, credit 3.75% against 2.64% and multi-strategy 9.80% against 8.94%, while tactical trading returned -10.15% against 7.06% and cryptocurrency -26.12% against -18.44%. Three of the five composites finished ahead of benchmark, with the Cross-Asset return held back by tactical trading and cryptocurrency rather than by the core equity and credit books. The same pattern is visible across the industry. Equity hedge led the major groups with a 9.6% gain over H1 and technology- focused managers returned 19%, outperforming the Nasdaq by around 600bps. Macro gave back ground in June, with the HFRI Macro Index down 1.5% and systematic diversified CTAs off 1.4%, as the retreat in energy prices removed the directional tailwind that had supported the strategy earlier in the year. Strategy selection rather than broad industry exposure accounted for most of the return outcome over the first half, and the unresolved geopolitical and rates backdrop suggests that continues into H2. |
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