Tuesday, January 8, 2019

2018's Hedge Fund Winners and Losers?

Alan Mirabella of Bloomberg reports, Hedge Funds Lost Almost 6% Last Year as Markets Roiled Managers:
Hedge funds posted a loss of 5.7 percent last year as managers struggled to capitalize on volatility and were roiled by political uncertainty.

For December, funds lost 1.9 percent, according to preliminary figures from the Bloomberg Hedge Fund Database.

The industry suffered through one of its worst years in 2018. Many managers not only failed to make money but did worse than the broader market. The return of volatility posed a challenge. The prospect of a trade war with China and the combative stance of President Donald Trump didn’t help.

For the year, the worst performers were Equity Hedge and CTA/Managed Futures strategies, which tumbled 7.8 percent and 7.2 percent, respectively. The only bright spots were Fixed Income Directional and Fixed Income Relative Value, which gained 0.2 percent and 1.3 percent, respectively (click on image below).


In December, the worst performers were Event Driven funds, which slid 3.5 percent. Equity Hedge funds declined 3.1 percent. Macro funds, by contrast, rose 0.2 percent.

Final December and year-end data become available around Jan. 14. All data are total return including reinvested dividends.
In his blog comment, Mark Rzepczynski notes it wasn't a great year for those looking for absolute returns:
The only hedge fund sectors that made significant returns in December were global macro and systematic CTAs. These are the divergence strategies that are supposed to generate returns when there are market dislocations. Macro and systematic managers, through casting a wide net across asset classes and going both long and short, should find opportunities when there are significant dislocations. The remaining hedge fund strategies lost money, but significantly less than the exposure to market beta. It was not a successful month for most hedge funds, but it was not as bad as exposure to equity beta. However, long duration Treasuries proved to be a better hedge.

For the year, many hedge fund strategies actually underperformed equity and fixed income beta benchmarks. The only areas that performed well on a relative basis were fixed income relative value and CTA (global macro and systematic) strategies. Of course, these are index averages, but it provides some insight on hedge fund behavior during a difficult year.



Interestingly, my industry contacts told me systematic CTAs got destroyed last year but that was before December came around so I'm not sure (the Blomberg data above seems right to me).

While it was yet another brutal year for most hedge funds, a few of the large quant funds taking over the world performed exceptionally well.

Robin Wigglesworth and Lindsay Fortado of the Financial Times report, Renaissance joins big hedge funds in defying 2018 gloom:
The flagship investment vehicles of Renaissance Technologies, Two Sigma, Citadel and DE Shaw notched up hefty gains in 2018, underlining how some of the hedge fund industry’s biggest names have managed to thrive despite renewed financial market turmoil.

They join rival fund Bridgewater in defying rocky markets last year, when almost every major asset class suffered reversals as investors fret over the health of the global economy and an inflection point in the era of low interest rates and ultra-easy monetary policy that had helped nurture a bull market.

Last year was among the worst for hedge funds since the financial crisis. Many stumbled as they were whipsawed by fierce economic and financial cross-currents, with the average hedge fund losing 6.7 per cent in the year to the end of November, according to HFR’s Global Hedge Fund index.

However, a clutch of the industry’s biggest players, especially ones that to a large extent use computerised strategies to trade markets, managed to sidestep the turbulence and profit from the resulting dislocations.

Bridgewater Associates’ Pure Alpha returned 14.6 per cent to investors net of fees, its best performance in five years, while DE Shaw’s $14bn Composite fund gained 11.2 per cent, according to people familiar with the matter. Two Sigma’s $9bn Absolute Return fund returned 11 per cent, while its “global macro” Compass fund notched up a 14 per cent gain in 2018.

“Quantitative firms that have made very significant investments in infrastructure, technology, data sets and human capital have an ongoing competitive advantage,” said John McCormick, chief executive of Blackstone Alternative Asset Management, the private equity group’s $80bn hedge fund unit.

“Increasingly, firms that have a clear view of what is going to be a differentiated capability and have the scale to build up those capabilities, those are the firms who have the ability to put up a solid return. The bar goes up every year,” he added.

Renaissance, founded by former cold war codebreaker Jim Simons and one of the leading quant firms, also enjoyed a strong year, despite being thrust into the public spotlight by the political activities of Robert Mercer, who was until November 2017 its co-chief executive.

Mr Mercer’s support for President Donald Trump and several conservative causes and organisations, such as Breitbart News, had made him a lightning rod of criticism, and heightened scrutiny of a hedge fund that has long been secretive even by the industry’s opaque standards.

However, the upheaval appears to have had little impact on Renaissance’s prowess. The Renaissance Institutional Equities fund last year gained 8.5 per cent, Renaissance Institutional Diversified Alpha returned 3.23 per cent and Renaissance Institutional Diversified Global Equity made 10.3 per cent.

Renaissance’s oldest fund, Medallion, is only open to the company’s employees, and its performance is not known.

Spokespeople for the various hedge funds declined to comment.

Ken Griffin’s Citadel, a multi-strategy hedge fund, also enjoyed a strong 2018, with its flagship Wellington fund gaining over 9 per cent, and its global equities and tactical trading funds returning almost 6 per cent and 9 per cent respectively, according to people familiar with the matter.

Markets initially started this year on the back foot, with investors still nervous over the health of the global economy. The turbulence has stoked expectations that the US Federal Reserve will halt its interest rate rises and triggered speculation that the central bank might even begin to cut them later this year.

While the Fed last month indicated it would likely raise rates twice more this year, Jay Powell, chairman, last week sounded a dovish note by stressing that the central bank would be “patient” and even raised the possibility that it could tweak its “autopilot” policy of shrinking its balance sheet. Coupled with better than expected US employment data, that sent the S&P 500 index up by 3.4 per cent on Friday and another 0.9 per cent by mid-afternoon in New York on Monday.

However, many investors and analysts remain jittery, with Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, warning that the fundamental outlook for 2019 remained murky.

“Valuation has been improving rapidly, especially in equity markets. Sentiment is cautious, but not extreme. Fundamentals, however, remain challenging, and the biggest hurdle to adding risk,” Mr Sheets wrote in a note to clients on Sunday. “Chair Powell’s comments on Friday on policy flexibility are encouraging, but there is still a lot of uncertainty over the threshold at which the Fed will actually change its policy path.”
In a terrible and volatile year like 2018 where almost all asset classes except the US dollar registered losses, these are impressive gains. In particular, Bridgewater which now manages $160 billion really upped its game to deliver 14.6% last year in its Pure Alpha fund:
Bridgewater Associates’ flagship hedge fund rose 14.6 percent last year as stocks fell broadly, according to a document seen by Bloomberg.

The Westport, Connecticut-based firm is the world’s biggest hedge fund with about $160 billion in assets. The gains for its Pure Alpha Strategy came as other fund managers were whipsawed by volatile markets, resulting in the industry posting one of its worst years ever.

Hedge funds on average lost 6.7 percent in 2018, according to the HFRX Global Hedge Fund Index. That compares with a 4.4 percent decline for the S&P 500 Index of stocks.

Since its inception in 1991, the Pure Alpha Strategy has had an average annualized net return of 12 percent, according to the document. The macro manager trades globally across more than 150 markets.

The firm was founded by billionaire Ray Dalio and its current chief executive officers are David McCormick and Eileen Murray.

A spokeswoman for Bridgewater declined to comment.
You'll recall back in September, Ray Dalio was warning investors we're in the 7th inning of the cycle, but my bet is by then, he was short all risk assets except maybe gold.

Why? Because just like his friend Larry Summers, Ray has been raising concerns that the Fed was overzealous in its tightening campaign. He knew something was going to break and his Pure Alpha fund was well-positioned for the huge downturn that ensued in the fourth quarter.

Now, I'd be curious to know how his All-Weather portfolio performed last year, so if you know, drop me an email.

What is impressive with all these large hedge funds isn't just their returns, it's their ability to generate high risk-adjusted returns given their scale.

On a risk-adjusted basis, I have no doubt that Ken Griffin trounced most of his hedge fund competitors. His flagship Wellington fund has consistently been producing high risk-adjusted returns since getting clobbered back in 2008.

Griffin is a hyper-competitive, incredibly sharp guy and I'm not surprised his multi-strategy fund did exceptionally well last year:
Big multi-strategy hedge funds found a way to make money in a tumultuous year when so many other firms floundered.

Ken Griffin’s Citadel, which runs more than $30 billion, rose 9.1 percent in its flagship Wellington hedge fund last year, and Izzy Englander’s $35 billion Millennium Management gained nearly 5 percent, according to people familiar with the matter. Hudson Bay Capital Management, which manages $3 billion, returned 6.5 percent, another person said.

These hedge funds, which trade across assets from stocks and bonds to currencies and interest rates, took advantage of the high volatility that sunk many equity strategies. Hedge funds on average sank almost 6 percent in 2018, according to preliminary figures from the Bloomberg Hedge Fund Database.

“Not all multi-strategy funds are made the same, which is really key,” said Tim Ng, chief investment officer of Clearbrook Global Advisors, which invests in hedge funds. “But the ones that did well last year, each of them had at least one allocation to a segment of the market that did particularly well," he said, pointing to volatility, convertible arbitrage, event-driven and securitized-credit wagers.

Not all multi-strategy firms were winners. Balyasny Asset Management, run by Dmitry Balyasny, ended the year down 7.1 percent in its Atlas Enhanced Fund, the people said. The firm has seen assets plunge to about $7 billion from $11.3 billion in early 2018.

D.E. Shaw & Co.’s $14 billion Composite fund was among the top performing multi-strategy vehicles, gaining 11.2 percent last year, Bloomberg reported Monday.

Citadel’s other strategies also notched gains in 2018. The Global Equities fund returned nearly 6 percent, the Tactical Trading fund was up almost 9 percent, and the Global Fixed Income fund rose 6.6 percent, one of the people said.

Spokesmen for the firms declined to comment.
As far as Jim Simons, the world's most successful hedge fund manager and undoubtedly the smartest of the group, he just makes it look easy, consistently posting double-digit gains every single year. Renaissance's 9% gain last year is actually an anomaly because it's on the low end of what the fund typically generates.

Anyway, top quant funds like Renaissance, D.E. Shaw, Two Sigma all did well last year which is impressive.

As far as the industry as a whole, not so good. Last January, I stated maybe it's finally time to take a closer look at hedge funds. In June, I reported that macro gods are staging a comeback.

I was right on the money on macro gods but now realize there are serious structural, not cyclical issues, which plague the industry and until those issues are addressed, if even possible, the sun is still setting on Hedgefundistan.

"C'mon Leo, it's easy, just put all your hedge fund money with Bridgewater, Brevan Howard, Citadel, D.E. Shaw, Millennium, Two Sigma, Renaissance and some other top funds you cover every quarter when looking at 13-F filings."

Be careful, today's hedge fund heroes can easily be tomorrow's zeros. It's highly unlikely with these premier brands but don't take anything for granted in these volatile markets.

In fact, last year was so brutal that even Steve Cohen's new fund delivered mediocre returns:
Hedge fund titan Steve Cohen, who had been banned from trading client money for two years, opened Point72 Asset Management to investors amid fanfare. Anticipation that the man whose former firm, SAC Capital Advisors, had averaged annual returns of about 30 percent would be back in the game attracted $5 billion of capital to his fund, making it one of 2018’s biggest launches.

But by the end of 2018, Point72 had made less than 1 percent for investors, according to people familiar with the matter. The fund, which started trading last spring, lost about 1 percent in October and 5 percent in November, which largely wiped out its gains for the year.
And he charges 3 and 30 for this "alpha"! Not a very good year to launch a hedge fund, that's for sure.

Also, while Alan Howard staged a comeback in 2018, Nishant Kumar of Bloomberg reports Brevan Howard's billionaire co-founder Chris Rokos had a lackluster year but is still on a hiring spree:
Billionaire Chris Rokos is seeking to raise as much as $900 million from investors for new portfolio managers he plans to hire this year.

Rokos Capital Management is adding a small number of employees for credit trading and for bets on energy and oil markets, and has begun discussions with potential investors to raise between $750 million and $900 million for the expansion, according to a person with knowledge of the matter. It will also strengthen emerging markets trading following the departure of senior money manager Borislav Vladimirov last year, the person said.

A spokesman for the London-based investment firm, which oversee about $8.2 billion, declined to comment.

Rokos, 48, is raising fresh money at a time when more macro managers are seeing performance improve, helped by rising volatility, trade disputes and a divergence in interest rates. Brevan Howard Asset Management, where Rokos made his name before starting his own firm, returned 12.3 percent last year for its best performance since 2009. Ray Dalio’s flagship hedge fund at Bridgewater Associates rose 14.6 percent.

Rokos -- whose wealth is estimated at $1.3 billion by the Bloomberg Billionaires Index -- had a modest year by comparison. Hit by a loss of just under 5 percent in December, his macro hedge fund erased most of the gains for the year to end up with a return of about 2 percent, the person said. The Rokos Global Macro Master Fund lost 3.4 percent in 2017.

Rokos co-founded Brevan Howard and made $4 billion for the firm from 2004 to 2012. He started his own firm in 2015 with initial capital from investors including Blackstone Group LP and raced ahead of Brevan Howard in terms of assets under management last year.

The firm raised $2 billion in additional capital in early 2017, after gaining 20 percent the prior year, and another roughly $800 million late that year.
When a superstar quant trader like Chris Rokos is struggling to post decent returns, you know it was a brutal year. It just goes to show you that you never know, even elite hedge fund managers can suffer a bad year in these markets.

I wish I can cover more here. I'd like to know the performance of all large hedge funds in each strategy. Unfortunately, that data isn't available yet, not publicly as of now (I'm sure Zero Hedge will post it once available).

All I can tell you is I'm pretty sure most L/S Equity funds got destroyed in the fourth quarter as most of them have way too much beta in their strategies and poor risk management.

Below, Bloomberg goes over 2018's hedge fund winners and losers. And Ray Dalio’s Bridgewater outperformed the market in 2018. Bloomberg’s Katrina Nicholas reports.

Lastly, Don Steinbrugge of Agecroft Partners expects the average hedge fund to be down around 4.5 percent, but says he is optimistic on the industry.

Update: For more details on how other hedge funds performed last year, read Shelly Hagan's Bloomberg article, Hedge Fund Performance in 2018: The Good, Bad and the Ugly. A word of caution, while Odey European was the top performer, gaining 53%, it was one of the worst performers in 2017. Crispin Odey's fund has been net short (and wrong) for a very long time.

And Bloomberg’s Alix Steel and David Westin report on how much hedge fund titans made in 2018. You can read the Bloomberg article on the best-paid hedge fund managers of 2018 here.

Lastly, Forbes had an article on the highest-earning hedge fund managers. I quote:
The hedge fund industry had a miserable year in 2018.  The average hedge fund manager returned -4.07%, according to HFR. That is slightly better than the U.S. stock market, which returned -4.38% last year. In total, the 20 highest-earning hedge fund managers and traders made a combined $10.3 billion in 2018. That’s a big number, but it is still the lowest such earnings figure since the financial crisis. In 2015, another weak hedge fund year, Forbes reported that the 20 highest-earning hedge fund managers and traders made $11.4 billion, and in 2011 they made $11.7 billion. 
Interestingly, Ray Dalio’s important All Weather Fund, in which he is heavily invested, was down by about 6% last year. Still, Dalio earned an estimated $1 billion in 2018.




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