The Best and Worst Hedge Funds of 2019?

Sonali Basak of Bloomberg News wrote a comment on LinkedIn on scouring the Earth for hedge fund returns:
Bill Ackman rebounded to a blowout year -- his publicly traded fund jumped 58% in 2019 -- but Ray Dalio is having his worst run in two decades at his best-known hedge fund. Ken Griffin’s ready to celebrate the 30th year of Citadel with its Wellington fund beating multistrategy hedge fund peers, and some of his firm’s alumni are raising major sums for new hedge funds that we’ll be watching closely. With the S&P rising 29% last year and the purge of funds deepening, here are some of the winners and losers as tracked by our investing team:
  • Tiger Cubs rally. Chase Coleman’s Tiger Global returned 33%, while Institutional Investor reports that Tiger “Grandcub” Dan Sundheim had a 22.4% gain in his firm’s most popular share class. Both firms increased despite a Juul drag. Andreas Halvorsen’s Viking hedge fund climbed 18% and Philippe Laffont’s Coatue rose as well.
  • Gabe Plotkin, a Steve Cohen protege, had a 47% increase. His Melvin Capital Management is a standout as most equity hedge funds trailed the market, my colleague Hema Parmar notes. Still, David Einhorn bounced back with a 14% gain, while Dan Loeb’s Third Point said its offshore fund was up 17% for the year.
  • Here’s where Citadel stood in relation to Millennium, Point72 and Balyasny.
  • The download on Dalio, plus our read-through for Bloomberg Television, where we talk through Ken Griffin’s gains as well.
Meanwhile, it’s time to ask: Have we reached peak quant? Cliff Asness’s AQR has faced assets slipping by almost 20% and headcount has dwindled to well below 1,000, where it was at the end of 2018. He’s cutting 5% to 10% more of his workforce, according to a story Bloomberg’s Saijel Kishan broke this week. We explain the under-performance for Bloomberg TV.

He’s not the only quant facing troubles. Igor Tulchinsky’s WorldQuant cut about 130 employees and is shuttering offices, Bloomberg’s Katia Porzecanski reported. Others -- D.E. Shaw and Renaissance Technologies, according to the FT -- have been faring a lot better.
It's early in 2020 but already news is breaking out about how top hedge funds performed last year.

For these elite funds, annual performance is important for three reasons:
  1. Bragging rights: Who earned the most in 2019?
  2. Marketing to prospective investors always helps when coming off a great year and
  3. Retaining and poaching top talent to make sure you maintain your edge.
There's no doubt the king of hedge funds in 2019 was Ken Griffin whose Citadel beat out rival fund, Steve Cohen's Point72, with a 19% gain last year:
Ken Griffin’s $30 billion Citadel saw its main multistrategy hedge fund soar 19.4% last year, topping rivals including Steve Cohen’s Point72 Asset Management.

Citadel’s Wellington fund gained across all five of the firm’s strategies after besting peers for most of the year, a person familiar with the returns said. Its Tactical Trading fund, a separate multistrategy fund that uses equity and quantitative approaches, rose about 20%. Point72 advanced about 16%, people said.

Citadel and Point72’s performance stands in contrast to the industry. Hedge funds returned 9% last year rebounding from a decline the year before, according to preliminary figures from the Bloomberg Hedge Fund Indices. Hedge Fund Research reported a 7.7% gain for the year on an asset-weighted basis. Meanwhile, the S&P 500 Index rallied 29%, extending the longest bull market in history.

Equities were the best performing fund strategy.

Sculptor Capital Management, formerly called Och Ziff, was up almost 15% return for the year. Dmitry Balyasny’s namesake firm returned 12% in its Atlas Enhanced fund, another person said. Meanwhile, Izzy Englander’s Millennium Management gained 9.8% and ExodusPoint Capital Management, run by Michael Gelband, ended 2019 up 6.8%.

Citadel’s Wellington fund rose 2.3% last month. Citadel also returned 2019 profits in full to investors, amounting to more than $6 billion.

Multistrategy funds trade across assets from company stocks and bonds to currencies and interest rates.

Representatives for the firms declined to comment.
Back in 2008, I told my readers to take advantage of Citadel's woeful performance to develop a long-term relationship with Ken Griffin. Smart investors like Ontario Teachers' didn't bail on Griffin back then and others were smart enough to take advantage of his fund's problems to build a new relationship with it.

Griffin is in a league of his own right now, he's operating one of the best hedge funds in the world and irritating his rival Steve Cohen who wasn't too happy after some of his top portfolio managers jumped ship to head over to Citadel:
Tensions between Griffin and Cohen extended beyond traditional fund competitiveness in 2019. At least five of Point72's portfolio managers left the firm for Citadel through the year, The Wall Street Journal reported in July. The departures upset Cohen, sources told The Journal, and the fund manager reportedly refused to shake one portfolio manager's hand when he revealed he took a job at Griffin's fund.

About 20 portfolio managers in total left Point72 last year, The Journal reported.

Point72 is Cohen's second foray into the hedge fund industry following the closure of SAC Capital in 2016. The first firm was among the most profitable hedge funds in the US before it pleaded guilty to an insider trading scheme in November 2013 and paid $1.8 billion in penalties.

SAC was also known as one of the nation's highest-paying funds, former employees told The Journal, saying that Point72's pay isn't as high compared to Cohen's first firm. Cohen expressed surprise at Citadel's compensation packages and looked for ways to boost payment at Point72, sources familiar told The Journal in July.
Cohen and Griffin are both intense and very competitive, sort of like watching Rafael Nadal vs Roger Federer although I find that rivalry far more entertaining and interesting.

To take things into perspective, both Griffin and Cohen's fund outperformed Izzy Englander’s Millennium by a wide margin last year, and that simply doesn't happen often except in years where the S&P is up 31% (total return). Englander tends to outperform when markets are choppy and lousy (on a risk-adjusted basis).

And that’s the thing about last year, while people are curious to know who were the hedge fund winners and losers, almost all hedge funds severely underperformed the overall market last year
Hedge funds returned 6.96%, on average, throughout 2019, according to data out Thursday, lagging the gains enjoyed in the broader stock market.

The data come from Eurekahedge, which compiled hedge-fund performance across four regions and nine strategies, with 85% of hedge funds reporting their November returns as of Dec. 31.

The strongest gains in all regions were found among long-short equity funds, which returned 8.64%. In contrast, the Dow Jones Industrial Average DJIA, +0.15% gained 22.3%, the S&P 500 SPX, +0.48% rose 28.9%, and the Nasdaq Composite Index COMP, +0.78% jumped 35.2% over the course of 2019.

While the broad aggregate averages reported here conceal lots of individual variation, it has been a tough year for hedge funds. Big-name investors like David Tepper converted his fund into a family office, returning all outside money back to his investors. Mick McGuire and Louis Bacon, meanwhile, recently closed their funds, with Bacon citing “disappointing results.”

Globally, investors pulled $131.8 billion out of hedge funds last year, Eurekahedge said, nearly $59 billion of which was in North America. In contrast, throughout most of 2019, investors plowed approximately $660.8 billion into exchange-traded funds, approximately 98% of which are passively managed investing tools. (That data came from the Investment Company Institute, and represents total exchange-traded fund assets as of Nov. 30, 2019, compared with total assets 12 months earlier.)
I think the gig is up for a lot of hedge funds. Central banks have made beta great again and clearly large investors prefer private equity funds over the long run and for good reason, they'll take that illiquidity risk for better alignment of interests and better long-term returns.

There's a lot of talk about hedge fund fees coming down, which they are, but not much in terms of improving alignment of interests (although some of the smaller funds I'm talking to are doing innovative things like refundable fees, very similar to PE clawbacks).

But some of the top funds are back at their old games, like putting up gates when they're underperforming:

Never, ever put up gates, especially when underperforming, you will burn your bridges with investors for a very long time, perhaps permanently.

Anyway, this year will be interesting. As top hedge funds stand on guard to front-run the Fed's exit strategy, it will be interesting to see who comes out ahead.

All I can tell you is if markets take a beating, most hedge funds will also get clobbered, maybe not as much but they're not immune to market downturns.

Conversely, if markets keep melting up all year (doubt it but you never know), it will add extra pressure on hedge funds as they will continue to underperform the overall market.

As far as the best hedge funds of 2019, who cares? The S&P was up 31% (total  return), so the biggest chumps were investors paying alpha fees for sub-beta performance.

Yes, top hedge fund investors are engaging in portable alpha strategies, swapping into an index and adding alpha strategies as an overlay but figuring out which hedge funds will come out ahead is very difficult.

My best advice for 2020 is stick with Griffin and Cohen but also increase exposure to Izzy Englander’s Millennium and Dmitry Balyasny’s Balyasny Asset Management as they tend to outperform in tougher markets (on a risk-adjusted basis and not always the case).

Whatever you do, be careful with L/S Equity funds which are glorified beta funds. If stock markets get roiled, they'll bear the brunt of hedge fund underperformance.

Below, Ken Griffin’s $30 billion Citadel saw its multistrategy Wellington fund soar 19.4% in 2019, gaining across all five of the firm’s strategies. Bloomberg’s Sonali Basak reports on “Bloomberg Daybreak: Americas.” Basak notes that Wellington earned 18.8% (annualized) since inception 30 years ago.

And among the winning firms who came out on top of the hedge fund industry last year, D.E. Shaw & Co.’s flagship fund saw a 10.5% return last year, while Rokos Capital Management paid out 51% more to its top staff in 2019 on a surge in revenue. Bloomberg’s Sonali Basak reports on "Bloomberg Daybreak: Americas."

Lastly, the number one ranked tennis player in the world offered "60 Minutes" a glimpse into his life before he takes the court in this month’s Australian Open. Jon Wertheim reports here. Like I said, some rivalries are far more entertaining and interesting than others.

Update: Read a follow-up comment on the world's most profitable hedge fund to gain more information on the top hedge fund of 2019. It doesn't negate the comments I wrote above.