A diverse range of hedge fund strategies is paying off this year after money managers ramped up their exposures across momentum-fueled markets.

Riding assets on the way up—or on the way down—is delivering payoffs nearly everywhere, from one-way bets on Japanese equities and artificial-intelligence darlings to cocoa, and more. 

At the same time elevated, yet steady, interest rates in the U.S. are helping stock pickers separate winners and losers by focusing on old-fashioned fundamentals like earnings growth and how much cash is piling up on balance sheets. 

Thanks to reliable trading patterns, 104 of the 106 indexes tracking fast-money strategies are up this year, according to a Hedge Fund Research gauge. That’s driven a 5.6% gain in a broad industry metric for the second-strongest start to a year since 2010, surpassed only by the late rallies of the zero-rate era.

“If you look across the hedge fund performance landscape, it ranges from being good to very good,” said Adam Singleton, chief investment officer of the external alpha strategy at the London firm Man Group. “It’s very unusual to have such broad-based strength.”

While average gains lag simple bets on U.S. stocks this year, it masks far bigger returns for the likes of momentum-driven futures traders, while muted cross-asset volatility is juicing positions across the board. 

Trend-following funds that typically wager in futures markets have eked out a 12% return through May, according to an index compiled by Societe Generale SA. An HFR index tracking the performance of macro funds—which bet on anything from monetary and trade policy to political trends—has returned 7.8%.

Niche players like Mulvaney Capital Management Ltd., founded by a former Merrill Lynch options trader, is up around 150% through May after riding trends in commodities like cocoa earlier in the year. DUNN Capital Management LLC’s $800 million flagship fund returned 22%, helped by positions focused on Japanese equities and short-term fixed income, according to a person familiar with the matter.

“Performance has been driven by strong trends in long equities, long agricultural and moderate trends short fixed income,” said James Dailey, DUNN’s chief executive officer. “It’s hard to tell if these particular trends will persist so our models will continue to follow the data and reposition if these trends expire.”

To Man’s Singleton, one reason this year has been good for stocks and momentum trades is that despite the sharp pullback in bets on U.S. rate cuts, the shift has been gradual and consistent.  

Along with that, volatility across asset classes is largely subdued. The Cboe Volatility Index, known as the VIX, has been hovering around the lowest levels since 2019 while the ICE BofA MOVE Index, which tracks expected turbulence in U.S. bonds, recently hit its lowest level since around 2022. That’s helping traders stick with their current positions.

Another way of thinking about: Assets are consistently performing as expected relative to their peers. Pair trades have been working as so-called cross-sectional momentum lifted strategies such as equity long-short stock picking and statistical arbitrage. The latter tracks the relative performance of various assets to choose winners and losers. For example, a Bloomberg multi-factor model—which dices and slices the market based on investment factors like value, momentum, low volatility and profitability—has gained 13% this year.

On the flipside, the overlap between long-momentum bets and hedge-funds holdings is at record high. That’s created a risk that the current gains could be jeopardized if trends reverse—since many have been piling into the same directional trades, and could unwind them in unison.

“If everyone does the right thing then everyone’s crowded,” said Singleton. “What is more important is understanding the shape of a selloff, understanding at what point do you need to take that risk, understanding that there can be momentum reversals. At the margin being nimble is a good idea most of the time.”

This article was provided by Bloomberg News.