Market Insights June 2, 2025

Hedge Funds: Profitable Risk Management.

The market rotation away from growth sectors during the second half of the first quarter compelled the industry to adopt a more defensive stance by reducing both gross and net exposures. In retrospect, this adjustment proved timely, considering how markets reacted to the announcement of US tariffs. Indeed, while indices dropped by nearly 15% following these announcements in April, alternative funds showed resilience, correcting by less than 5% at their lowest point. The strict discipline fund managers impose on themselves is therefore effective, even if it limited participation in the subsequent rebound. Over the year, their performance remains very close to that of equity markets. Moreover, opportunities to generate attractive returns are plentiful. For example, geographic diversification is once again proving effective. This is further complemented by low correlation between sectors, creating room for arbitrage opportunities. We find it appealing to diversify both geographically and by strategy type, with significant exposure outside of U.S. technology, where inefficiencies appear more prevalent as investors are only beginning to return their attention to this segment.

United States: a growing deterioration in visibility

The month of May was marked by a certain de-escalation in the trade war between the United States and its various partners. Agreements were reached with the United Kingdom and China, and discussions are underway with Europe to find compromises that would limit the tariffs imposed by the US on all its imports.

However, these “negotiations” currently appear chaotic, driven by the incessant reversals of Donald Trump. Periods of de-escalation are quickly followed by new threats from the US President at a frenetic pace, tariffs on aluminium and steel, on smartphones manufactured outside the US, and threats of 50% duties on Europe whenever negotiations progress too slowly for Mr. Trump’s liking. Executive orders are issued almost daily, drastically eroding the visibility that financial markets so urgently require.

Adding to these presidential theatrics are court rulings attempting to curb the US President’s abuses of power. These decisions are immediately appealed, often by judges whose impartiality is increasingly being called into question.

Certainly, equity market performance in May has been far more favourable for investors, with US stock indices staging a remarkably swift rebound. The S&P 500 surged 6.2%, and technology stocks rose by nearly 10%. But while this market rally is welcomed, it is as abnormal as the steep declines seen in March and April, which had dragged major US indices into bear market territory.

Uncertainty remains elevated in financial markets, and equally so for businesses trading in or with the United States. This loss of visibility has led to a notably cautious tone in corporate guidance for the coming quarters, when such guidance hasn’t simply been withdrawn altogether.

While investors are gradually adapting to a new volatility regime, as Donald Trump’s credibility continues to wane, the current environment does not allow for bold positioning in the markets. We continue to recommend maximum diversification across equity markets and a neutral sector bias in order to navigate through this period of uncertainty.

This week’s figure: 35

The number of years since the US market recorded such a strong stock performance in May. The classic saying “Sell in May and go away” clearly did not hold true this year.