The Covid-19 crisis has created the widest gulf in performance between top and bottom hedge funds in more than a decade, with sharp gains generated by several managers helping to revive interest in the industry.
Ructions that rippled through global markets in early 2020, followed by the enormous rebound rally opened opportunities not seen since the 2008-09 financial crisis. But that same wave of volatility also wrongfooted a clutch of the sector’s biggest names.
The top 10 per cent of hedge funds recorded average returns of 49 per cent over the 12 months to the end of November, the best performance since 2009, according to data group HFR. At the same time, however, the gap between the top and bottom deciles widened to 68.9 percentage points, marking the biggest difference in 11 years.
“Plenty of hedge funds nailed 2020,” said Andrew Beer, managing member at US investment firm Dynamic Beta Investments. Many “had their best year since the great financial crisis”.
Such performance is more reminiscent of the hedge fund industry’s ‘golden age’ before the crisis triggered waves of stimulus measures from central banks that dulled volatility, several industry participants said. The strong run by top funds has ignited renewed investor interest after years of lacklustre returns, they said. “Hedge funds have become investable again,” said one hedge fund investor.
Another investor described a “wall of money trying to get into hedge funds” next year, but added that some may struggle to place funds with their desired managers if they chose to close to new investments.
Pershing Square’s Bill Ackman, Caxton Associates’ Andrew Law and Saba Capital’s Boaz Weinstein are among the biggest winners from this year’s market swings. For managers positioned the right way, precipitous falls followed by even bigger rebounds in some assets provided the kind of moneymaking opportunities rarely seen in a largely-becalmed decade dominated by central bank bond-buying.
Directional bets as investors dumped risky assets in favour of havens in February and March were some of the most lucrative trades. Mr Law’s Caxton made a record 40 per cent gain, boosted by bets on government bonds, according to an investor, while Brevan Howard gained 24 per cent.
Lan Wang Simond’s Mandarin Offshore fund returned almost 28 per cent, bolstered by bets on technology stocks and by cushioning itself against the March market turmoil. Former Third Point analyst Jamie Sterne’s New York-based Skye Global gained 63.8 per cent, also helped by trading in and out of soaring technology stocks, according to numbers sent to investors, while Daniel Loeb’s bullish call on the US election helped him to a quick $400m profit and a 19.1 per cent gain this year.
Pierre Andurand’s Andurand Commodities made 64.6 per cent and his Discretionary Enhanced fund, which can take more risk, gained 152 per cent, after predicting oil prices would turn negative, while Vancouver-based Delbrook Capital surged 109 per cent, helped by bets on M&A in the gold sector.
Billionaire Jeffrey Talpins’ $17bn-in-assets Element Capital, which made a prescient prediction on the efficacy of the Pfizer Covid-19 vaccine, gained 15 per cent. Massi Khadjenouri’s Kite Lake Event-Driven fund notched up returns of 7.1 per cent. Izzy Englander’s $48.5bn-in-assets Millennium Management gained 23.3 per cent, while Connecticut-based Verition Fund Management made 26.5 per cent.
Buying protection against the sell-off was also highly profitable. Saba’s Mr Weinstein profited from a well-timed bet against junk bonds, as well as trading mispricings in firms’ capital structures, to gain 70.8 per cent, according to numbers sent to investors. Mr Ackman’s Pershing Square Holdings made 65 per cent, bolstered by a $2.6bn profit on credit default insurance, while 36 South’s $2bn Kohinoor fund, which buys option protection, is up about 73 per cent, despite some losses since March.
Several quant funds, whose trading is based on computer algorithms, also managed to outperform in a mostly gloomy year for the investment strategy. Systematica’s BlueTrend fund, run by Leda Braga, has gained 7.6 per cent this year.
Qube Research & Technologies, a $3bn hedge fund that span out of Credit Suisse nearly three years ago, is enjoying its strongest year on record, said a person familiar with its performance. And, despite several funds losing money trading over-the-counter markets, where liquidity sometimes dried up, Gresham Investment Management’s ACAR fund gained 8.5 per cent.
This year’s volatility also caught out some of the sector’s biggest names.
Billionaire Michael Hintze suffered a $1.4bn loss, driven by bad structured credit bets, in his flagship Directional Opportunities fund. He gained nearly 9 per cent in November, reducing losses this year to about 36 per cent, according to an investor update seen by the Financial Times.
It has been “arguably the most turbulent year in financial markets for a generation”, Sir Michael wrote in a recent letter to investors, also seen by the FT. He has repositioned CQS to profit from new opportunities and strengthened the firm’s senior management.
David Harding’s Winton Group, which made a controversial decision several years ago to move away from a style of computer-driven trading Mr Harding helped develop in the 1980s, suffered a 22 per cent fall in its main fund.
And in the US, Jim Simons’ Renaissance Technologies, widely regarded as one of the world’s top hedge fund firms, lost 33.3 per cent in its Institutional Diversified Alpha fund and 22 per cent in its Institutional Equities fund. Ray Dalio’s Bridgewater took a hit with its flagship Pure Alpha fund down more than 10 per cent, even as its All Weather fund has recorded gains. Machine learning specialist Voleon is down 8 per cent in its Investors fund, while its Institutional fund is flat.