Hedge fund performance dispersion soars as brand names post big gains and hefty losses

Bull and bear

Nick Evans writes that severe market turbulence in the past few weeks has sparked extreme mixed fortunes for several of the world’s biggest and best-known hedge funds – with some eye-catching gains in April as well as a few jaw-dropping losses.

On the plus side, Ken Griffin’s USD50 billion Citadel group generated impressive performance across its multi-strategy suite of funds in the highly unsettled and increasingly bearish market environment in equities and bonds – while, on the minus side, Chase Coleman’s rapidly shrinking Tiger Global suffered further blows from its heavy exposure to tech and growth stocks that have been battered in the recent rout, slumping by 15 per cent in April for a stunning year-to-date loss of 44 per cent that has cost the fund some USD17 billion.


Ray Dalio’s USD150 billion Bridgewater Associates – the world’s largest hedge fund – is also on a performance roll as macro managers continue to exploit the turbulent market conditions, with the firm’s flagship Bridgewater Pure Alpha Fund gaining 8 percent in April and now up by over 26 per cent this year.


Among other leading brand-name hedge funds, Cliff Asness’s USD120 billion AQR Capital Management is enjoying an impressive revival on the back of the resurgence in value stocks, with its main funds up between 20-30 percent for the year to date – against a 30 percent fall in the growth stock-dominated Nasdaq Composite Index this year – while Bill Ackman’s high-profile Pershing Square fund dropped 8 percent in April, largely due to a USD400 million hit from jettisoning its position in Netflix, whose stock has tumbled in the tech tsunami.


Across the hedge fund industry as a whole, performance dispersion has been extreme – with macro, commodity, quantitative and trend-following strategies posting strong returns while equity and event-driven funds have suffered in the market maelstrom that has been triggered by skyrocketing inflation, fast-rising interest rates, growing recessionary fears and escalating geo-political tensions.


Underlining the dramatic disparity in performance, global hedge fund research firm HFR said the top decile of the constituent funds in its HFRI industry index had gained an average of almost 9 per cent in April while the bottom decile had declined by an average of over 10 per cent – giving a top-bottom dispersion of nearly 20 per cent on the month. For the first four months of the year, according to HFR, the top decile of the HFRI constituents has risen by an average of just under 35 percent, while the bottom decile has fallen by more than 22 per cent.


HFR’s monthly performance analysis for April showed macro funds surging to what it described as “record outperformance, posting historic, negatively-correlated gains as equities posted steep declines”.


The investable HFRI 500 Macro Index advanced by over 5 per cent in April, the second highest monthly return in the history of the index, to bring the year-to-date performance of the macro strategy index to over 15 per cent – a record start to a calendar year, according to the firm.


Overall, the investable HFRI 500 Fund Weighted Composite Index posted a narrowly positive return of 0.2 per cent in April – giving a negatively correlated gain in a month when the S&P 500 fell by almost 9 per cent and the Nasdaq was off by a further 13 per cent in its steepest monthly fall since October 2008.


With fixed income markets also plunging, legendary hedge fund trader Paul Tudor Jones – head of the Tudor Investment Corporation – said in an interview with CNBC this month that the environment for investors was worse than ever as rapid interest rate rises by the Fed and other central banks to battle the spike in inflation risk tipping major economies into recession.


“You can’t think of a worse environment than where we are right now for financial assets,” he said. “Clearly you don’t want to own bonds and stocks.”


Tipping “simple trend-following strategies” as the likely best way for investors to navigate through the intensifying turmoil, Jones added: “I think we are in one of those very difficult periods where simple capital preservation is the most important thing that we can strive for. I don’t know if it’s going to be one of those periods where you’re actually trying to make money.”


Pointing to what he depicted as a “current fluid market paradigm defined by extreme volatility, massive dislocations, and tremendous uncertainty”, HFR president Kenneth Heinz said: “Hedge funds advanced in April as financial market volatility spiked while global equity and fixed income plunged in a record and correlated manner.”


He added: “Institutional investors are prioritising interest rate sensitivity and duration, inflation protection, capital preservation and volatility-positive portfolio attributes, with minimal correlation to current equity market declines. Hedge funds which have demonstrated their ability to provide these characteristics are likely to lead industry growth and outperformance of equity markets through this unprecedented geo-political and macro-economic uncertainty.”

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