The Inflation Effect on Hedge Funds

The Inflation Effect on Hedge Funds

Inflation has occupied the minds of the Federal Reserve and U.S. consumers since the term “transitory” admittedly became out of step almost 1.5 years ago as noted in this Reuters report. And rightfully so, as inflation directly affects everything from consumer purchasing power to company profit margins. Additionally, policy responses to persistent inflation, such as raising interest rates, can have knock-on effects on the economic conditions and risk premia, as discussed in the first part of our series.

In this iteration we look at realized manager returns conditioned on low/high inflation regimes. For manager returns we use the PivotalPath Indices and the 12-month percentage change in the Core Consumer Price Index (CCPIY) as a proxy for inflation. Our data covers the period Jan 2000- Dec 2022.

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