Stockpickers are showing signs of rescuing the reputation — and fortunes — of the hedge fund industry.
Nearly three-quarters of the way through the year, hedge funds focused on equities are outperforming nearly every other strategy, buoying the returns of the industry even as some high-profile macro and commodities funds struggle, according to people with knowledge of the funds’ recent performance.
The better showing comes as the US stock market has broken free of tight correlations of recent years in which sectors have generally moved up and down together, a pattern that has favoured passive investors over stockpickers.
The realised correlation of companies that make up the S&P 500 is just under 20 per cent this year, down from 60 per cent a year ago and one of the lowest readings in more than a decade, according to Morgan Stanley.
The easing in correlation between both sectors and companies has rewarded doyens of long/short strategies, in which funds sell the shares of companies they believe to be weak while buying those with stronger prospects of outperforming. Equity hedge funds including Chris Hohn’s TCI, Luxor Capital, Glenview Capital and Light Street Capital are all up double-digits for 2017, making them some of the year’s top performers.
Karim Leguel, the head of hedge fund solutions for Emea at JPMorgan Asset Management, says they are still bullish on equity long-short funds “given the improving fundamentals and rising dispersion across stocks and sectors”.
In broad terms, hedge funds focused on US equities are up more than 8 per cent this year. While lagging the S&P 500’s total return of 12.7 per cent and the Nasdaq 100’s gain of 24 per cent, some funds have generated a double digit performance for 2017.
Among smaller equity funds, Light Street Capital, a Palo Alto-based tech-focused fund that goes long and short stocks and manages around $1.1bn, has returns of 47 per cent. Another California-based long-short equity fund, the $500m China-focused Yiheng Capital, is up 51 per cent.
Many big-name equity shops are also having strong years. TCI, one of the largest activist funds in Europe with $16bn under management, is up 25.6 per cent to the end of August. One of its most lucrative investments has been in Safran, the French aerospace company. TCI led a fierce campaign to force Safran to revise its offer for Zodiac Aerospace.
The largest London-based European long-short equity funds, Lansdowne and Marshall Wace, are also having strong years. Lansdowne’s smaller funds — European Equity, Princay and Energy Dynamics — have all returned close to 15 per cent. Marshall Wace’s flagship Eureka fund has returned about 8.5 per cent.
Hedge funds, which had come under a barrage of criticism in recent years for charging hefty fees while underperforming, saw investors pull billions of dollars last year, while flocking to passive or private equity strategies instead.
The chorus of investors demanding fee reductions has started to subside as performance has improved, and investors are again trickling back to the strategy, allocating slightly more money to hedge funds than they are redeeming.
Yet not all funds have capitalised on the renewed surge in equities that began with US President Donald Trump’s election, as investors anticipated a business-friendly regime would allow share prices to flourish. Crispin Odey’s European fund, which fell 50 per cent last year, is down more than 10 per cent this year. David Einhorn’s Greenlight Capital, meanwhile, has dropped about 2 per cent.
As much as some equity and emerging markets funds have returned hefty numbers, some big-name macro fund managers have struggled, while systematic and commodities funds have also been lacklustre.
Brevan Howard, one of the largest hedge funds in Europe, run by Alan Howard, was down nearly 4 per cent in its flagship fund at the end of July, while Paul Tudor Jones’s Tudor Global was down about 2 per cent through the end of August. Paul Brewer’s Rubicon Global Fund, Andrew Law’s Caxton Global, and Louis Bacon’s Moore Capital also saw returns in some of their funds decline.
For some of the funds that have performed well, the high returns have given them something of a comeback.
Och-Ziff, whose assets have fallen to $32bn from a peak of $48bn in July 2015, is still recovering from a $413m charge it paid last year for violating anti-corruption laws. Its returns will be a rare bright spot. The firm’s flagship Master Fund, a multi-strategy fund, is up 10 per cent through to the end of August while its smaller Asia Master Fund is up nearly 20 per cent. For the equities fund Luxor Capital, the comeback began last year and has continued this year as its investments in a handful of food delivery service companies have turned a hefty profit.
Overall, hedge funds across all strategies are up about 5.5 per cent this year, according to the data provider eVestment, just below the 5.7 per cent they returned for all of last year.
While stockpickers have made a start this year, the industry’s overall performance will have to improve further to quell the criticism and entice investors back.