Hedge Funds Ain’t Dead Yet
With an improved environment for stock picking, the average hedge fund is up an average 5.4% through August
Written off less than a year ago as overpriced and underperforming, hedge funds are pulling off an unexpected two-step this year: Making money and taking in new cash.
The average hedge fund is up 5.4% through the end of August, while stock-focused hedge funds have gained 8.31%, according to researcher HFR. Over the same period, the Standard & Poor’s 500 rose 11.9% including dividends, while the traditional 60-40 split of stocks and bonds would have earned 8.9%.
That makes this year the industry’s best relative performance in a rising market since 2010. Investors, particularly in Asia and the Middle East, have begun sending new money hedge funds’ way, attracted by the better returns and a broad lowering of the industry’s famously hefty fees.
For now, at least, the gloom that had beset hedge funds is lifting and even giving way to outright optimism.
“It just feels better,” said Alper Ince, partner at hedge-fund investor Pacific Alternative Asset Management Co. Mr. Ince credited an improved environment for stock picking that has fallen in hedge funds’ favor, with popular stocks like Amazon.com Inc. outperforming, and bets against retailers also paying off.
A year ago, things looked ugly for the industry.
Longtime managers like Richard Perry were shutting down, and many who remained were forced to negotiate their fees to sate disappointed backers. The pressure was compounded by a decade of nearly uninterrupted gains for the S&P 500, contributing to dramatic outperformance for low-cost, passive investment products.
Sticking around seemed even less attractive as managers had to dip into their pockets to pay out ever rising salaries to dissuade staff from leaving for flush technological companies dangling seven-figure packages.
Earlier this year, for instance, billionaire Kenneth Griffin was so frustrated with investment performance at his $27 billion hedge fund, Citadel LLC, that he sent the staff a stinging mass letter that read in part, “I am disappointed that after years of leading our industry we failed to deliver,” people familiar with the matter said. Citadel separately announced that compensation for some staff would be slashed.
This year, Citadel’s flagship fund is up more than 9% through mid-September, already eclipsing last year’s total 5% gain. Last year was the fund’s weakest mark in nearly a decade, the people familiar with the matter said.
Hedge funds at large pulled in $39 billion of new money this year, a reversal of $112 billion in outflows last year, researcher eVestment says. Industry executives expect the inflows to continue with several banner fund launches in the months ahead, including the return of fallen star Steven A. Cohen and a multibillion-dollar China-focused fund from Ray Dalio’s Bridgewater Associates, the world’s largest hedge-fund firm.
Few managers expect a return to the heyday of a decade ago, when every young trader with a pulse dreamed of a hedge fund of their own. Privately, many industry executives fret that the industry, which bets on and against markets world-wide, has been tagged with a permanently undesirable patina.
Fall is typically the season of hedge-fund shutdowns and this year is no exception. The well-known so-called value investor Whitney Tilson said last week he would shut his hedge-fund firm, Kase Capital Management LLC, which had dwindled to $50 million under management and lost 8% so far this year.
Among hedge funds girding for a continued bumpy road ahead is GoldenTree Asset Management, a $25 billion firm.
This month, GoldenTree warned investors in a private note reviewed by The Wall Street Journal that credit markets were “providing mid cycle pricing for late cycle risk.” GoldenTree’s main fund is up 5% this year, the note indicates.
Within hedge funds, macroeconomic-focused managers, who try to get ahead of political and other broader trends, have mostly whiffed in predicting this year’s major moves, particularly the weakening in the U.S. dollar, investors say. The average macro fund is roughly flat this year, according to HFR.
For now, the industry’s gains are shared by managers large and small, including many who came into the year with something to prove.
One of the biggest rebounds is under way at Brahman Capital Corp., a New York hedge-fund firm that flew under the radar for more than three decades.
At its apex around two years ago, Brahman managed more than $5 billion, as principals Mitchell Kuflik and Robert Sobel bet big on hedge-fund favorite Valeant Pharmaceuticals International Inc. When Valeant’s stock plummeted from $257 to $14 a share, Brahman fell in turn, as the firm reported losses and investors pulled their money.
Brahman sold Valeant stock last year and with what is now $3.8 billion of remaining cash pivoted to new ideas like a stake in travel company Expedia , people close to the firm said. This year, Brahman’s main fund is up 17%, the people said.