Hedge fund giants lose their appeal

Investors have thronged the biggest hedge funds for the reason that final monetary disaster as they sought security in dimension. Now, they’re paying a hefty worth.

Supersized funds are failing their purchasers throughout a interval of market upheaval that in idea ought to pose an unprecedented likelihood to make money. Instead of profiting, although, among the world’s largest hedge funds have barely managed to guard their buyers from losses.


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A Hedge Fund Research gauge that offers extra weight to bigger gamers was down 4.4% this 12 months via September, whereas all hedge funds on common managed to eke out a small revenue. Gold-plated names which have slumped embrace Bridgewater Associates, quant powerhouses Renaissance Technologies and Winton, Michael Hintze’s CQS and Lansdowne Partners.

The losses are largely hurting influential institutional buyers — pension funds, insurers and endowments — that contribute most to the business’s property and again the largest funds. A reckoning looms as purchasers speed up their flight. Investors pulled $89 billion from hedge funds within the first 9 months of the 12 months, primarily from giant companies, in keeping with Eurekahedge information.

“A very large portion of the assets invested in large hedge funds have not performed all that well and so it’s causing investors to reassess their objectives,” mentioned Chris Walvoord, world head of hedge fund analysis at funding guide Aon Plc. They’re asking, “Why am I invested in this? What’s the purpose?”

Larger hedge funds have historically been seen as extra secure in down markets, a notion borne out in efficiency information going again greater than a decade. Big funds misplaced lower than their smaller counterparts practically two-thirds of the time for the reason that world monetary disaster, in keeping with an evaluation of each loss-making month from 2008 to 2019. But that sample broke down in 2020.

Hedge funds with greater than $1 billion in property racked up about $60 billion in efficiency losses this 12 months via September, or simply over 5% of their capital, in keeping with Eurekahedge. Investors would have finished much better with an index fund monitoring the stock market: the S&P 500 rose 5.6%.

The supersizing of hedge funds advanced as establishments regularly changed rich people as their largest purchasers. Since most of these buyers lack inhouse analysis groups and must allocate lots of of hundreds of thousands of {dollars} to have any significant influence on their portfolios, they’ve tended to park money with the biggest, well-known hedge funds.

This has led to bigger funds gobbling up recent capital and smaller ones working out of enterprise. Of a web $170 billion poured into hedge funds since 2010, some $135 billion has gone into bigger ones, in keeping with HFR information.

Size has turn into a burden. The sheer scale of some funds makes it tougher for them to react by switching out and in of bets. So when volatility roiled shares, bonds, currencies and commodities earlier this 12 months, numerous large gamers misplaced file quantities of money.

The eight months via August had been ugly: Bridgewater Associates’ flagship fund misplaced 18.6%; Renaissance Institutional Equities was down 13%; Winton’s major fund slumped about 19%; Hintze’s CQS hedge funds fell 42.5%; whereas Lansdowne Developed Markets Fund was down virtually 22%.

With the US election across the nook and a raging pandemic nonetheless inflicting havoc throughout continents, there’s little signal that the volatility that bled hedge funds is on the wane.

“Market fragility remains elevated and speed is also high, meaning sharper but shorter duration moves are more likely to occur,” mentioned Adam Jones, a accomplice at funding advisory agency Albert E Sharp.

Even earlier than the pandemic, buyers had been questioning the excessive charges charged by hedge funds for mediocre returns. Until now, many obtained away by blaming the dearth of volatility for their woes — so 2020 ought to have doubtlessly offered their finest buying and selling alternative in years.

Not all giant hedge funds have disenchanted. Multi-technique companies equivalent to Citadel, Balyasny Asset Management and Millennium Management, which depend on dozens of merchants to generate income, are having one among their finest years. Such funds are usually dominated by trading-oriented methods and volatility tends to create extra alternatives for them.

One motive why smaller funds are doing higher is that they’re leaping on very area of interest buying and selling alternatives that simply don’t have capability for the billions of {dollars} their bigger friends want to speculate. Some macro hedge funds run by the likes of Brevan Howard Asset Management, Rokos Capital and Caxton Associates have additionally churned out bumper income. But they disguise a more true image of an business which continues to wrestle.

“The irony is that the hedge fund industry was built on investing with small, nimble managers who could exploit esoteric investment opportunities,” mentioned Andrew Beer, founding father of New York-based Dynamic Beta investments. “The last several years have shown that sometimes big might be too big, especially when fees consume most performance.”

© 2020 Bloomberg


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