Hedge funds endured a difficult September as rising bond yields, stronger oil prices and sharp swings in AI-related stocks created a challenging trading environment, according to a report by Reuters citing prime brokerage data and industry investors.

Fundamental equity long-short strategies were among those under pressure, with the average fund losing 0.55% during the month, according to Goldman Sachs Prime Services. The strategy nevertheless outperformed the broader MSCI World Index, which declined 1.3%.

Systematic equity long-short funds, by contrast, delivered a much stronger performance. Computer-driven strategies gained 3.46% in September, their strongest monthly return of the year, Goldman Sachs data showed.

Markets were heavily influenced by central bank policy during the month, with the Federal Reserve raising interest rates for the first time since 2023 and signalling that further increases could follow. Higher oil prices linked to the conflict with Iran added to inflation concerns, while US Treasury yields climbed to their highest levels in roughly two decades.

At the same time, concerns over the sustainability of AI-related spending triggered sizeable moves in heavily owned technology stocks across markets including the US and South Korea. The volatility created both opportunities and risks for hedge funds attempting to navigate crowded positions.

Goldman Sachs said hedge funds were net sellers across most US equity sectors in September. Within technology, however, trading flows diverged, with electronic equipment and hardware seeing selling pressure while semiconductor equipment and software attracted significant buying.

Performance in Asia was weaker than the global average. Morgan Stanley estimated that Asian hedge funds across strategies fell 0.6% through 25 September, compared with a 0.2% decline globally, as economic uncertainty weighed on returns.

Not all strategies struggled. Commodity and rates moves provided opportunities for managers positioned to capture major market trends, with trend-following strategies among September's strongest performers.

The Société Générale Trend Index gained more than 4% during the month, helped largely by short positions in fixed income and long exposure to energy markets, according to Winton Group.

The changing interest-rate environment could also produce a wider performance gap between hedge fund strategies, as managers with different funding structures and market exposures respond differently to higher borrowing costs.