Hedge Fund Winners and Losers Emerge as Year Ends on Better Note
by Katia Porzecanski , Nishant Kumar , and Bei Hu
December 20, 2016, 12:00 AM CST December 20, 2016, 8:14 AM CST
Strategies focused on macro trends produced the worst returns
Who Were 2016's Hedge Fund Winners and Losers?
This was the year to ridicule hedge funds. Pension funds, politicians,
Warren Buffett, even hedge fund managers themselves -- they all had
something to say about the disappointing performance, high fees and market
saturation.
Well-known managers from Ray Dalio to John Paulson saw performance on their
main funds range from flat to double-digit losses, while some distressed-
debt investors like Jason Mudrick benefited from the rally in commodities
prices. Strategies focused on macro trends and equity hedges -- which have
seen returns crimped by swollen stock-market valuations and ultra-low
interest rates -- produced the worst returns.
But as the year draws to an end, the industry’s gotten an unexpected pick-
me-up. The ripple across markets from the surprise victory of U.S. President
-elect Donald Trump bolstered returns -- reversing the fortunes for some --
and may prove to be a boon going forward. With his policies expected to
increase interest rates, produce a wider dispersion in earnings across
industries and trigger more merger activity, hedge funds may soon be put
back to work.
“The tide has definitely turned,” said Adam Blitz, chief investment
officer at Evanston Capital Management, which farms out money to hedge funds
. “Since the election I’ve definitely sensed a bit of a change in attitude
among folks who are saying, ‘Boy, we don’t know exactly what the future’
s going to hold, but it’s unlikely to be more of the same.”’
2016’s Double-Digit Winners and Losers
The year saw a wide range of returns, even within the same strategies.
FUND NAME
FIRM AUM
(BILLIONS)
YTD
RETURN (%)
STRATEGY
Renaissance Institutional Equities Fund* $32 19.3 Quantitative
Two Sigma Compass Cayman Fund $38 10.4 Quantitative
Owl Creek Overseas Fund* $2.4 14.5 Event-driven
Pershing Square Holdings $11.6 -13.5 Event-driven
Paulson Advantage $12 -16 Event-driven
Element Capital Management $9 15 Macro
Dymon Asia Macro Fund (Singapore) $5.2 12 Macro
Mudrick Distressed Opportunity Fund $1.5 35.5 Distressed
Marathon Special Opportunity Fund $13 18.5 Distressed
CQS Directional Opportunities $12 30 Multi-strategy
BFAM Asian Opportunities Master Fund $2 16 Multi-strategy
Pine River Liquid Rates Fund* $10.7 16 Relative Value
Proxima Capital LP $0.200 44.2 Long/Short Equity
Passport Global Strategy $3.1 -15.2 Long/Short Equity
Horseman Global Fund $2 -17.6 Long/Short Equity
Odey European $8 -48 Long/Short Equity
OCP Asia’s Orchard Landmark Fund $1.2 13 Credit
Paulson Credit Opportunities $12 11 Credit
Note: YTD returns as of Nov. 30. *Indicates through Dec. 9.
Macro Funds Disappoint
While hedge funds betting on macroeconomic trends had one of the worst-
performing strategies in 2016, the volatility spurred by Trump’s win
changed the course for managers such as Brevan Howard Asset Management and
Rubicon Fund Management. Brevan Howard’s master fund rallied in November,
erasing earlier declines and bringing returns for the year to 2.8 percent,
an investor letter shows. Rubicon’s Global Fund surged 21 percent last
month, returning it to a profit of 2.2 percent from a loss, a person
familiar with the matter said.
Some macro funds like Dymon Asia Capital (Singapore)’s $721 million Asia
Currency Value Fund, which focuses on exchange rates and gold, benefited
this year from bearish bets on the region’s currencies -- especially on the
yen weakening against the dollar. That fund gained 22 percent last month
and surged 45 percent this year through November.
‘Game Changing’
Other marquee macro funds saw deep losses pared. The Pure Alpha II fund, run
by Dalio’s Bridgewater Associates, was down 10.3 percent at the end of
September and has since surged, bringing losses through Nov. 30 to 0.2
percent, two people said.
The Trump era could “ignite animal spirits” and attract productive capital
, Dalio wrote in a LinkedIn post on Monday. “If this administration can
spark a virtuous cycle in which people can make money, the move out of cash
(that pays them virtually nothing) to risk-on investments could be huge,”
he wrote.
Moore Capital Management’s Macro Managers fund trimmed losses for the year
to 1.23 percent through Dec. 1, a person said.
Moore’s founder, Louis Bacon, said in a Nov. 28 letter to investors that he
’s “exceedingly upbeat” for the first time in several years about the “
game-changing trading opportunities that lie ahead.” Moore pointed to Trump
’s victory and the prospects for higher interest rates, a stronger dollar,
booming corporate sector and improving market liquidity.
“The recent election in the United States has, in our view, launched
nothing short of a sea change in the potential opportunity set for trading
markets globally,” Bacon said in the letter.
Long-Short Equity
Long-short equity hedge funds produced big losers and winners. The strategy
returned an average 2 percent in the first 11 months of the year on an asset
-weighted basis, according to Hedge Fund Research Inc.
In Europe the $9.2 billion Lansdowne Developed Markets Fund dropped 18
percent and Crispin Odey’s flagship fund slumped 48 percent. His fund
gained more than 20 percent in the two trading days after the U.K.’s June
vote to exit the European Union, known as Brexit, but slipped after British
stocks rebounded on a weaker pound.
“A number of managers were trapped by the selloff and sector rotation at
the start of the year, while they failed to capitalize on post-Brexit rally
due to lack of risk-taking,” Nicolas Roth, co-head of alternative assets at
Geneva-based investment firm Reyl & Cie, said of European hedge funds.
In the U.S., Blackstone Group LP’s $1.8 billion Senfina Advisors lost 24
percent this year through November and John Burbank’s Passport Capital saw
its Global Strategy fund decline 15.2 percent in the same period.
By comparison, New York-based Proxima Capital Management surged 14 percent
in November alone, extending gains for the year to 44 percent, while the $1.
2 billion Senvest Management surged almost 20 percent over the same period
in its master fund, according to people familiar.
Distressed-debt hedge funds, mostly concentrated in energy-related bets,
profited from the rally in oil prices this year, returning 12 percent on
average. Mudrick Capital Management saw some of the biggest gains, soaring
35.5 percent through the end of November. The $13 billion Marathon Asset
Management’s Special Opportunity Fund rallied 18.5 percent and the main
fund for the $21 billion Canyon Capital Advisors gained 8.3 percent,
according to people with knowledge of the matter.
The LIM Asia Special Situations Fund, which has $304 million of assets,
returned 10 percent through November, boosted by gains in high-yield bonds
that recovered with commodities prices, according to chief investment
officer George Long.
With corporate defaults bound to increase alongside interest rates,
distressed-debt hedge funds look to remain strong with a wider range of
opportunities arising in the next 12 to 18 months, said Panayiotis
Lambropoulos, a money manager at the Employees Retirement System of Texas.
Stock Pickers Return
Next year stock-pickers, who struggled this year to stand out amid an almost
all-encompassing equity rally, may also have their time to shine, according
to David Saunders, chief executive officer at Franklin Resources Inc.’s
hedge fund investor K2 Advisors.
With Trump focusing on deregulation and the repatriation of overseas cash,
companies may step up stock buybacks, capital expenditures and takeovers,
Saunders said. Changes to Obamacare, trade deals and infrastructure spending
will impact the health-care, technology, steel and mining industries, he
said.
“We’ve got some proposals on the table in the Trump administration which
present potential opportunity,” Saunders said at a Dec. 7 conference. “The
best way to express that is through someone who has an ability to be long
and short, go to cash, sit on the sidelines and move nimbly through the
market.”
