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Sharp sell-offs throw $3tn sector off course, with Europe especially badly hit

Buoyed by growing interest from institutional investors, 2018 was supposed to be the comeback year for hedge funds.

It has not worked out that way. Stalling global equity markets, compounded by sharp sell-offs in February and October, have thrown the $3.31tn sector off course.

Investors pulled a net $10.1bn from hedge funds in the year to October, according to eVestment, the data provider.

European-domiciled groups have been hit particularly badly, with net outflows of $12.8bn over the 10 months, down from net inflows of $28.9bn last year. By contrast, the Americas have had net inflows of $3.86bn and Asia net outflows of $650m.

The reasons for this are opaque, says Peter Laurelli, eVestment’s head of research, though lower returns have probably played a part.

The average return for European-domiciled funds for the ten months was minus 3.7 per cent compared with minus 2.6 per cent globally. Continental funds fared worst, returning minus 4.82 per cent, while the UK was minus 3.12 per cent.

October was an especially bad month but for the year as a whole there have been redemptions across various strategies. Despite a huge surge in interest in quantitative managers, many “commodity trading advisers” — computer-driven trend-following funds — have had a bad year.

There have been bright spots too. Some macro funds, which bet on the global economy via interest rates, currencies and bonds, have performed well due to volatility in emerging markets and the rising US dollar.

Discretionary funds have also done well, offering succour to more active managers. “It is interesting that we’ve seen the more discretionary focused managers do better in this environment,” Mr Laurelli says.

The month-to-month performance of individual groups has been almost as choppy as the market. With a few weeks left till the end of the year there is time to recover . . . or flounder.

FTfm takes a closer look at the mixed performance of five of Europe’s biggest hedge fund names.

Among the world’s best-known but most secretive macro hedge funds, Brevan delivered one of the surprises of the year.

The firm was once considered the gold standard among hedge funds. It became a must-have fund following gains of 20 per cent in its main fund during the 2008 financial crisis and, before 2014, it had a record of making money every year. All this propelled assets to about $40bn.

In recent years, however, its fortunes turned. A move by traders, including co-founder Alan Howard, to Geneva was seen as a mis-step. It also lost star manager Chris Rokos. The firm chalked up three calendar years of losses between 2014 and 2017. Assets have dropped to just $6.8bn as clients fled.

Brevan entered 2018 in bad shape. This meant that its table-topping performance came as a surprise. One driver has been a particularly well-timed bet on Italian bond spreads widening. Mr Howard’s style is to place bets on sharp market dislocations, which can mean his portfolios do little for a long time before suddenly reaping huge gains. This proved the ideal way to profit from the turmoil in May, when Italian two-year bonds suffered their worst day in decades.

Brevan’s main fund is up by a net 12.3 per cent this year, said a person who has seen the numbers, while a punchier fund run personally by Mr Howard has made much bigger gains.

A spokesman for Brevan declined to comment.

The overarching industry narrative of more actively managed strategies making returns while quantitative funds suffer has played out at Man, the world’s largest publicly traded hedge fund group known for its computer-driven equity strategies.

Strategies in AHL and Numeric, its computer-driven trading units that use computer algorithms to make investment decisions, generally performed poorly. The worst performer for the nine months to September was the Numeric Emerging Markets Core strategy which was down 8.7 per cent on a net basis. The star was the GLG Continental European Growth Fund, part of the group’s discretionary trading unit, which has had a year-to-date return of 7.5 per cent net.

Assets at Man, which is led by Luke Ellis, rose to a record $114.1bn in the third quarter but the London-listed company’s share price has declined by almost 30 per cent since the beginning of the year.

Analysts are split over the medium-term outlook. “Despite a somewhat dull period for investment performance, we continue to believe that Man . . . operates a superior business model within the active asset management space,” said Paul McGinnis at Shore Capital.

Yet there are “many short to medium-term uncertainties at Man, including inconsistent performance/performance fees, volatile flows and fee margin pressure,” according to David McCann, analyst at Numis.

Man declined to comment.

For one of the world’s biggest and most successful equity hedge funds, a poor 2018 caps a disappointing run of performance. The flagship fund at Lansdowne, which runs about $20bn in assets, is its Developed Markets fund, run by Peter Davies — best man at former chancellor George Osborne’s wedding — and Jonathon Regis.

So far this year the fund has lost a net 5.6 per cent, much of which came in October’s market sell-off. Only two years ago it suffered a loss of about 15 per cent, losing money on positions in UK stocks and on bets taken against commodity stocks. It gained almost 10 per cent last year, although fund managers viewed that as a disappointing result, a person familiar with the matter said.

“Returns are clearly disappointing,” the managers wrote in a letter to clients last month, reviewed by the Financial Times, referring to a small loss suffered in the first nine months. “There is no doubt our level of frustration is probably as high as we can recall.

“To some degree this frustration is undoubtedly amplified by the proximity of the period to our UK-induced problems in 2016.”

Messrs Davies and Regis’s approach is to do fundamental analysis and take large, long-term positions in stocks. That, though, can leave you exposed in the shorter-term. Lloyds Banking Group, for instance, a long-term holding that the managers think will benefit as it increases payouts to shareholders, is down by about 17 per cent this year.

The Lansdowne Princay fund, a smaller fund launched in recent years as a vehicle for former BlueCrest fund manager Samuel Joab, has fared even worse, falling a net 10.4 per cent this year.

Lansdowne declined to comment.

This year was neither stellar nor catastrophic for Marshall Wace, one of the UK’s biggest hedge funds, with the performance of the $39bn group broadly flat.

The flagship $17bn fund MW Eureka, which is overseen by co-founder and chief investment officer Paul Marshall, is up 1.7 per cent in the year to date although it was down 3.9 per cent net in October. MW Eureka allocates to both Tops, the systematic strategy that uses algorithms to trade on investment bank recommendations, as well as fundamental strategies.

Its best-performing strategy was the $1.3bn fundamental Japan Market Neutral equity long-short strategy, which was up 8.3 per cent net in the ten months to the end of October, according to a person who had seen the numbers.

This strategy is run by Rod Rehnborg, a Hong Kong-based manager who has penned a guide on the basics of investing for Goop, the lifestyle shopping site founded by Gwyneth Paltrow. “There are no easy answers, although a mix of stocks, hedge funds and vegetable gardens seems sensible to me,” he wrote.

Marshall Wace declined to comment.

The group, which employs 260 people, has been investing heavily in data science. It is chaired by Brexit-supporting Mr Marshall although Ian Wace, its co-founder and chief executive, wanted the UK to remain in the EU. It recently bulked up its operations in Dublin ahead of the UK‘s departure and in June established a presence in mainland China by setting up a wholly foreign-owned enterprise, a structure that allows companies to establish operations there without having to be the minority partner in a locally controlled joint venture.

Like other computer-driven trend-following specialists, Winton suffered in February and October.

The $26.9bn group is one of the largest quantitative investing firms in the world. Its main fund, the Winton Fund, was down 0.45 per cent net on the year at the end of October.

Founder and chief executive David Harding said the group had a “couple of painfully bad days” in February when trend-following approaches suffered amid a lurch in the markets. Winton has been reducing the weight of trend-following approaches in its funds and is aiming to complete this process by the beginning of 2019.

The group is looking to grow in China where it has received approval to register with the Asset Management Association of China as a private securities investment fund manager. Its China strategy was up a net 6.3 per cent at the end of October.

The group is also branching out into the provision of data analytics services to tap growing investor demand for tools to analyse unstructured data. Earlier this year it spun off Hivemind, its big data analytics unit, which began offering services to external clients in 2017. Winton retains a majority stake in the business.

UK to unveil £1bn life sciences investment

Government keen to show Britain remains attractive despite Brexit

Hundreds of millions of pounds worth of fresh investment in UK life sciences will be unveiled next week as the government seeks to show that Britain remains attractive to global industry, despite the continuing political turmoil over Brexit.

The centrepiece is expected to be an announcement of further investment by UCB, a Belgium-based company that already has a significant presence in the UK.

Its commitment will form part of a new life sciences “sector deal” that is expected to include as much as £1bn of additional investment by the industry, according to one person briefed on the announcement.

It will come against the backdrop of Theresa May’s attempts to drum up business support for her Brexit agreement.

Next week is the last chance for the prime minister to win Parliamentary support for her plan, which will be the subject of a historic vote on December 11.

She is hoping that companies will lean on wavering Tory MPs by warning about the unpalatable impact of a no-deal Brexit for their industries.

A year ago the government announced its first life sciences deal. It showcased investments by two large pharmaceutical companies — MSD, the name by which Merck is known in the UK, and German company, Qiagen — amounting to more than £1bn and creating nearly 1,000 high-skilled jobs, along with a raft of smaller investments.

However ministers have been keen to keep up the momentum with a fresh series of announcements to counter suggestions that the UK has lost its allure for investors after another year of uncertainty over the post-Brexit environment.

Both publicly and privately, the leaders of some big pharma companies have warned ministers of the danger that the UK will lose out on investment, not simply due to Brexit uncertainty but also the slow take-up of innovative medicines by the National Health Service.

Writing in the Financial Times in June, the UK head of Pfizer, Erik Nordkamp, who has since been appointed president of the Association of the British Pharmaceutical Industry, said: “The UK pharmaceutical industry and the patients who rely on it are under serious threat from Brexit as well as from the flawed way medicines are developed, tested and made available to patients in the country.”

Headquartered in Brussels, UCB has a focus on neurology and immunology and employs about 650 people across the UK and Ireland, the majority of whom are scientists working in research and development. The UK is home to one of the company’s two global discovery research centres.

On its website the company, which had global revenue of €4.5bn in 2017, says it is a “top 5 investor in biopharmaceutical R&D in the UK” and is “proud to have over 100 collaborations with UK universities, charities and companies, covering over 200 projects”.

One person familiar with the company’s thinking suggested that other locations for its additional investment had been considered before it opted for the UK.

Speaking to the FT in February last year, Jean-Christophe Tellier, the company’s chief executive, described one of the strengths of the UK as “the ability to get this triangle between London, Cambridge, and Oxford. The ability to get together not only strong academic backgrounds and people, but also access to financing and access to very strong hospitals, key opinion leaders, clinicians.”

“The quality of the people has not changed …because suddenly Brexit happened,” he said.

UCB did not respond to requests for comment.

May pulls out of EU programme on post-Brexit security grounds

Britain will walk away from the military aspects of the €10bn European Galileo satellite navigation system over fears that it would not be able to influence the programme’s development after the UK leaves the EU, the government has announced.

The UK will instead pursue building its own secure global satellite navigation system which will be compatible with the US Global Positioning System, prime minister Theresa May confirmed on Friday.

The decision will be a blow for Britain’s space industry, which had hoped that a compromise might be reached. Several UK-based companies have been closely involved in the development of Galileo, which was launched in 2003 as the world’s first civil-run satellite navigation system.

Both Galileo and the earth observation programme Copernicus, on which talks are continuing, had been seen as important to meeting the UK’s ambition to generate £40bn in sales from the space sector by 2030. Britain has left open the possibility of using the civilian aspects of Galileo.

Mrs May, who is in Argentina for a G20 summit, blamed the decision on the European Commission’s persistent refusal to allow the UK access to Galileo’s secure elements once its leaves the EU.

“I have been clear from the outset that the UK will remain firmly committed to Europe’s collective security after Brexit,” Mrs May said.

“But given the commission’s decision to bar the UK from being fully involved in developing all aspects of Galileo it is only right that we find alternatives. I cannot let our armed forces depend on a system we cannot be sure of. That would not be in our national interest.”

Whether Britain could retain access to Galileo’s secure public regulated service (PRS), an encrypted military grade signal, post-Brexit has been one of the most contentious issues during the withdrawal negotiations.

Under EU rules, non-member states cannot be involved in the development of PRS. The rules allow for such countries’ armed forces to use PRS with a security agreement but London has argued that it also needs oversight of the technology and its future development if it is to have confidence in the security of the system.

Gavin Williamson, the defence secretary, insisted on references to Galileo being restricted in the non-binding declaration on future UK-EU relations. The final declaration says that the UK and EU will simply consider “appropriate arrangements on space co-operation, including satellite navigation, where in the Parties’ mutual interest”.

However, the government has yet to make progress in recouping the €1.4bn it has invested in Galileo to date.

Although Britain’s investment is estimated to deliver returns to UK industry of €1.15bn up to 2020, the government is expected to seek compensation as part of the overall settlement with the EU.

The decision comes in the same week that Airbus, the European aerospace group, revealed that it had moved 80 jobs to sites on the Continent to be able to complete work on its final Galileo contract. UK-based companies have already been excluded from bidding on new contracts.

The government announced in August that it would spend close to £100m on an 18-month feasibility study to explore the development of a domestic satellite navigation system.

The UK is looking for partners on its new secure system, beginning with Australia and New Zealand. More than 50 UK companies have so far expressed an interest. Developing a fully fledged alternative, however, is expected to cost £3bn-£5bn.

Paul Everitt, chief executive of ADS, the aerospace, defence, security and space industry body, called on the government and industry to “work closely together and move quickly to make sure that advanced and valuable UK capabilities in this field are sustained”.

Graham Peters, chair of UKspace, the space industry lobby said: “This latest statement reinforces the need to ensure that the UK alternative to Galileo is fully committed, robust and sustainable.

“UKspace members are already engaged in the feasibility phase of the UK satellite navigation programme and we hope that early decisions are made about the full programme to allow industry to sustain the essential skills needed in the UK over the long term.”