Hedge funds lick wounds after tough year
What was meant to be the big comeback year for the beleaguered hedge fund industry has instead been one of its toughest since the financial crisis.
Wrong footed by central banks and sudden bouts of market volatility, some of the world’s best known hedge fund managers such as Bill Ackman and David Einhorn have suffered stinging losses, while other large funds, like Mike Novogratz’s Fortress Macro Fund, have closed down altogether.
“People have been burnt in so many places,” says one manager of a multibillion dollar hedge fund. “We are living in a new sort of world, where large moves in markets are happening, but they happen very quickly and more abruptly, being condensed into a few days rather than a few months. These moves are very, very difficult to trade.”
Hedge funds are under pressure over fees and lacklustre performance from an increasingly conservative investor base — now more likely to be pension funds rather than yacht-hopping private millionaires. The travails of 2015 have further dented the industry’s reputation.
In January many hedge fund managers that specialise in making big bets on the direction of interest rates and currencies believed that finally, after several years of directionless markets, their time had come.
At the heart of this thinking was the idea that so-called “policy divergence” driven by the idea that the Federal Reserve would inevitably begin to raise interest rates over the course of 2015, while the European Central Bank would continue loosening monetary policy.
Many hedge funds bet big against the euro and in favour of the US dollar and although they were ultimately correct in terms of these currencies diverging, the trading of this relationship has proven painfully volatile. Many hedge funds have been caught off guard by brutal swings and reversals that resulted in a number of them losing their nerve.
“2015 simply hasn’t lived up to expectations,” says Julien Calavia of Aberdeen Asset Management, which invests in hedge funds. “People late last year were expecting a lot from macro hedge funds due to Fed and ECB going in different directions. But the Fed delayed and this led to a choppy market that doesn’t suit macro managers.”
Some of these macro managers will no longer be around to see if their trades finally make money when the Fed meets next week and is widely expected to shift rates higher.
Mr Novogratz, the manager of Fortress Investment Group’s $2bn flagship macro fund had earlier in the year told his investors that the hedge fund industry was “Darwinian”.
“Do well and you raise assets,” he said in a July conference call. “Do poorly and you lose assets.”
By October his fund closed down having lost 17.5 per cent over the year, making it one of the worst performing hedge funds in the world.
Last week BlueCrest, which until last year was one of the largest hedge funds in the world managing $35bn at its peak, decided to close itself to outside investors, arguing that it was no longer worth the trouble of dealing with external clients. While BlueCrest’s flagship funds had performed significantly better than Fortress, it too had struggled alongside its macro peers to generate investment performance over the past three years.
Confusion and uncertainty over the direction of US interest rates spilled over into stock markets, with some of the best known specialised stock pickers suffering some of their worst years of performance in their careers as large concentrated bets went wrong.
Bill Ackman’s Pershing Square, which in 2014 was one of the world’s best performing hedge funds, lost more than a fifth of its value up to the end of last month after its outsized position in the US drug company Valeant tumbled.
Another respected stock picker to suffer was David Einhorn, whose Greenlight Capital has lost more than 15 per cent after its “value orientated” portfolio of stocks posted heavy losses, while its short positions did not decline enough to compensate.
Crispin Odey, the outspoken London-based investor, had long warned of a bubble inflating in China and other emerging markets, and had taken out sizeable short positions to benefit from this. However a mistimed currency bet inflicted a near 20 per cent loss in April, and his fund was down 12 per cent in the middle of last month.
While the majority of hedge funds have struggled over the year, some did benefit from well-timed trades against particular stocks. The Mayfair-based Lansdowne Partners saw both of its main funds return over 10 per cent for investors, with its large short position against the commodities group Glencore paying off handsomely.
Marshall Wace, another London fund which this year sold a stake in itself to the private equity group KKR, also managed to be one of the few hedge funds to significantly beat the wider market. Its principal funds, Eureka and MW TOPS Market Neutral, have risen 9 per cent and 16 per cent respectively.
After a painful year of trading many hedge funds are now finding cause to be optimistic for the next, arguing that their trades will eventually be proven right by the market. But if they fail, many more hedge funds are likely to close down for good.