Israeli Hedge Funds Underperform Market in Q3 Amid Stagnant Trading

Israeli hedge funds experienced a decline in performance during the third quarter, erasing the gains they had made against stock and bond indices in the first half of the year. Data indicates that equity-focused hedge funds yielded an average return of 9% in the first nine months, while the Tel Aviv 125 index, a benchmark for these funds, rose approximately 11% during the same period. This contrasts with the first half of the year, when equity hedge funds averaged an 11% return compared to the index's 9% rise.

The underperformance in the third quarter is attributed to a stagnant market, a scenario less favorable for hedge funds that typically thrive on volatility. During such periods, they often employ investment strategies involving costly hedging mechanisms. The Tel Aviv 125 index saw a modest 1% increase in the third quarter, driven by a strong performance in the Tel Aviv 35 index (3.3%) but offset by a similar decline in the Tel Aviv 90 index.

Among notable performers, the Sphera Long fund, established last year, reported a 41% return from January to September, following a 16% gain in its initial operating months of 2025. Other top performers include the Hatzabim Long fund with a 17% return and two funds from the Nokud group, Nokud Long and Nokud Equity, each with a 14% return. The Nokud group, the largest in terms of assets, is managed by former Prosperities Investment House executives. At the lower end, the Alpha Value fund saw a 7% decrease in the first nine months, after a 40% return last year. Ra'am Equity and Total Long funds also posted minimal gains or losses after strong performances in 2025.

A similar trend was observed in bond-focused hedge funds. Despite the Tel Bond 60 index rising 3% from January to September, nine bond-focused hedge funds averaged only a 2% return. The Sphera Bond fund led this category with a 6% increase year-to-date, followed by Hatzabim Bond (4%) and Vertical (3%). Total Bond saw a 2% decrease, while Nokud Bond remained flat, and Ra'am Bond gained 1%.

Ron Sontag, a partner at Sphera, cited the sharp rise in U.S. bond yields as a significant factor impacting various interest-rate-sensitive sectors, including real estate. He also noted the unusual surge in corporate profits, particularly in sectors like semiconductors, defense, and alternative energy, which experienced both growth and interest-rate sensitivity. Sontag also pointed to the significant drop in the share prices of Israeli chip and renewable energy companies in the third quarter, which weighed on the indices.