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"Threads of hope for a more dovish posture from central bankers dissolved as January's inflation measurement was released mid-February and came out above expectations at 6.4%. Markets for U.S. government debt continued to form an inverted yield curve, a powerful recessionary signal that has presaged all prior recessionary periods in modern history," remarked Ben Crawford, Head of Research at Backstop BarclayHedge. "The U.S. economy continued to shrug off the Fed's monetary tightening and the bond markets' doomsaying. To the surprise of more than a few forecasters, real GDP for the fourth quarter of 2022 grew at a rate of 2.9% (annualized). While high-profile layoffs and new jobless claims did tick up in January, new payroll headcount grew robustly suggesting a tightening rather than a loosening labor market. In short, the macroeconomic outlook got decidedly murkier in February."

Hedge fund subsectors reporting average trading profits in February were led by the Emerging Markets MENA Index, which popped an impressive 10.86%. In some sectors, such as non-directional strategies, gains were typically more modest; the Fixed Income Arbitrage Index was up 0.96%; the Equity Market Neutral Index gained (+0.82%); and the Merger Arbitrage Index rose (+0.18%). In other cases, incremental returns were more an indication of mixed results in the segment: Distressed Securities Index was up 0.18%; the Technology Index climbed 12 basis points; and the European Equities Index cobbled together 6 bips.

Hedge fund subsectors posting losses in February outnumbered their profitable colleagues by a better than three-to-one margin. Most Emerging Markets pulled back in February after strong starts in January. Subsectors with the largest losses in February included Emerging Markets Global Equities Index down -4.93%; the Emerging Markets Latin American Equities Index was off -3.98%; the Emerging Markets Global Index slipped -3.62%; the Emerging Markets Asian Equities Index and the Emerging Markets Asia Index were down -3.49% and -3.35%, respectively; the Emerging Markets Global Fixed Income Index fell -3.02%; the Emerging Markets Latin America Index lost -2.86%; and the Emerging Markets Index closed down -2.84%.

On the strength of a roaring January, year-to-date gains remained the norm across all but a handful of hedge fund subsectors. Subsectors posting the largest aggregate gains were the Emerging Markets MENA Index up 11.35%; the Technology Index (+5.91%); the Equity Long Bias Index (+3.87%); the Event Driven Index (+3.40%); the Pacific Rim Equities Index (+3.14%); and the European Equities Index (+2.70%).

As of the end of February, only three hedge fund subsectors were down for the year: the Volatility Trading Index was off -0.71%; the Emerging Markets Latin America Index dropped 15 basis points; and the Emerging Markets Global Fixed Income Index was basically flat, down two basis points.

"In February, a capricious Mr. Market clawed back much of the coin he had showered so generously on investors during January's ecstatic trading. The carnage was particularly eviscerating amidst those with long exposure to emerging market equities, but impacted many disparate markets and trades," reflected Crawford. "It became more difficult to read the economic tea leaves in February, and I suspect this contributed significantly to the month's jarring about-face."