For some of the hedge fund industry’s titans, including Nelson Peltz and William Ackman, 2016 is starting with heavy losses as big bets on General Electric, Valeant and Mondelez have been battered by the market’s abrupt drop.Wow, nearly $8 trillion wiped off world stock markets this year and hedge funds have managed to escape the market carnage and show their investors why it's worth paying them 2 & 20 to deliver absolute returns, or more likely, relatively better returns than markets getting pummeled.
But as a group, hedge funds have navigated the sharp sell-off relatively smoothly, finally boasting better performance than the equity markets they have trailed for the past years.
With the Standard & Poor’s 500 index tumbling another 3 per cent on Wednesday, pushing the U.S. stock-market benchmark down 10 per cent for the year to date, most investors are feeling pain.
Mr. Peltz’s Trian Fund Management lost nearly 10 per cent in the first two weeks of 2016 while Mr. Ackman’s Pershing Square Holdings, coming off a 20-per-cent loss in 2015, tumbled 11.4 per cent through Jan. 12, investors familiar with the numbers said.
More broadly though, hedge funds, which oversee $2.9-trillion (U.S.) in assets for pension funds, governments, and wealthy private investors, have lost only 2.5 per cent, Hedge Fund Research data show, besting the benchmark stock indexes double-digit losses.
The outperformance from hedge funds may be acting as a ballast for the market over all, as those managers seek opportunities in falling shares rather than fleeing, according to some strategists.
“This is going to be a more volatile period of time and there will be excessive swings in the market,” said Charles Krusen, whose Krusen Capital allocates to hedge funds, but “that will also provide opportunities especially for hedge funds that can act as a buffer when the markets go down,” he added.
Goldman Sachs analysts said global hedge funds lost less than 1 per cent last week, when the Dow Jones industrials average tumbled into correction territory, hurt by falling energy prices, China’s currency devaluation and fears of weaker global economic growth.
This year’s best-performing hedge fund, according to industry tracker HSBC, is the Horseman Global fund, which is up 10.49 per cent through Jan. 13 after having gained 20.4 per cent last year.
Early winners this year also include Millennium Management, the $34-billion fund run by Israel Englander, which ended 2015 with a 12.7 per cent gain. Kenneth Griffin’s $25-billion Citadel, which gained 14.3 per cent last year, is up again, as is Jacob Gottlieb’s $8-billion Visium Asset Management, according to people who have seen their performance numbers.
Analysts at Credit Suisse’s prime services division said hedge funds’ relatively low exposure to stocks, which they say is near a two-year low, plus smart sector bets helped even stock-focused fund managers absorb January’s equity rout, with estimated losses of only 1.2 per cent to 1.6 per cent through the end of last week.
Hedge funds have lost less money in bets on financial stocks, industrial stocks and consumer discretionary stocks, Credit Suisse found. Since the early part of the month, hedge funds have seen their long bets underperform a bit, but short positions have outperformed, the firm said.
For some, tumbling markets are putting their favourite names on sale, fund managers said.
“The market is having a temper tantrum, nothing more, so I view this turmoil as a buying opportunity,” said Whitney Tilson, who runs hedge fund Kase Capital. She noted, however, that prices are still not as cheap as they were in 2008 or 2011.
Indeed, some managers are saying that they are trading in and out more actively these days as they are having a tough time getting the stocks at the prices they want.
No matter how small the losses are this year, managers are acknowledging the tough environment and their investors are keeping a close eye on movements, urging managers to make sure they are well-hedged. David Einhorn, whose Greenlight Capital is widely watched, reassured investors that he is concentrating on better returns in 2016 after losing 20 per cent last year.
Investors who allocate money to hedge funds on behalf of wealthy clients have said they could make more changes by terminating some managers in the months ahead.
Last year, they pulled $1.5-billion out of hedge funds in the fourth quarter, marking the first time the industry saw net redemptions since the fourth quarter of 2011, Hedge Fund Research data show.
But for now, they see little room to exit hedge funds altogether.
“Seven years post-Lehman, investors may suffer from the seven-year itch to stray from their investment discipline. However, the fact that there is no other obvious alternative to put your money may inadvertently protect some investors from themselves,” said Putri Pascualy, who invests in credit-oriented hedge funds at investment firm PAAMCO.
Before you go chasing after hedge funds which will gouge you on fees, take a step back, and be a lot more critical of what you read in the media. No doubt, some of last year's best performing hedge funds are doing very well early this year, especially large multi-strategy funds that focus on teamwork and hedge funds shorting oil and the energy sector.
But it's still very early in the year and as I explained in my recent comments on the bloodbath in stocks nearing an end and oil's nightmare dominating Davos, the markets were due for a major bounce and if central banks come out with a coordinated response, watch out, things will reverse quickly next month.
Also, I'm not convinced most hedge funds escaped the market carnage. In fact, Rob Copeland of the Wall Street Journal reports, Hedge funds have a hot idea: retreat:
Hedge funds reeling from the recent stock-market turmoil are rallying around a hot tip: Buy nothing.But markets are moving so fast, it's hard to know who to believe. Another article by CNBC reports even though the U.S. stock market is off to one of the worst starts ever, hedge funds are buying the most equities they have in five years, according to data from Bank of America Merrill Lynch.
After an abrupt decline that sent the Dow Jones Industrial Average deeper into correction territory, a number of hedge-fund managers are playing defense. Some are stockpiling cash. Others, including some managers who are known for making bold bets on stocks when markets plunge, are bracing for an extended downturn unlike any seen in recent years.
“We wake up every day looking for reasons to buy new stocks or increase existing positions, but just as often we find reasons to sell positions instead,” Cobalt Capital Management wrote in a recent note to investors that also disclosed it is holding onto a high proportion of cash. “Everybody likes buying a bargain, but catching a falling knife is no fun at all.”
The hesitancy shows the high level of uncertainty around the declines in stocks, oil and other assets this year.
“It’s really the inverse of what we’ve seen previously,” said Steven Bulko, chief investment officer of hedge-fund manager Lombard Odier Asset Management (USA) Corp. “Dips usually get bought and rallies usually get sold.”
Mr. Bulko has reduced his use of leverage, or borrowed money, and said he doesn’t expect as quick a rebound as in recent drops.
In a reversal of market stereotypes, meanwhile, individual investors appear to be taking a relatively sanguine view of the upheaval.
Vanguard Personal Advisor Services, the online investment-advice arm of Vanguard Group, has seen no uptick in emails, spokeswoman Katie Hirt said. Some clients have called their advisers and asked whether now is an opportune time to “buy the dips,” she said. The service manages $31 billion.
More investors are moving into passive, market-tracking funds like those offered by Vanguard in recent years.
T. Rowe Price Group Inc., the fund company that manages more than $725 billion, said the volume of calls from small investors in January is running 3% below the same period last year.
“It’s fairly business as usual and kind of quiet, to tell you the truth,” said Glenn Pendleton, the firm’s head of individual and institutional services. “We’re not feeling the craziness being put on by the market right now.”
Hedge-fund managers have been under pressure after a streak of disappointing performances. The average hedge fund lost money in 2015, falling short of a thin gain for the S&P 500, including dividends, and a broad Barclays bond index. Investors pulled money from the industry overall in the fourth quarter for the first time in four years, industry tracker HFR Inc. said.
Managers are down again this month on average, according to early estimates from HFR.
Already in the year’s opening weeks, the activist investor Nelson Peltz’s Trian Partners is down nearly 10%, more than wiping out its gain from 2015. Trian’s largest positions include the conglomerate General Electric Co. and chemical giant DuPont Co., which have both sustained losses.
Larry Robbins’s Glenview Capital Management has lost nearly 14%, while William Ackman’s Pershing Square Capital Management is down 12%, adding to steep losses for those managers last year.
Even some of the firms that are typically among the steadiest performers are nursing losses.
Senator Investment Group LP, part owned by private-equity firm Blackstone Group LP, is down around 3%, a person familiar with the matter said, nearly matching its loss from 2015.
Some of the best-known hedge-fund managers are warning that this might be no ordinary slide. Omega Advisors Inc. founder Leon Cooperman, who has forecast rising stocks for years, is cautioning investors to be wary in what he has described as an unusual and unpredictable environment, a person familiar with the matter said.
David Einhorn, the hard-hit manager of Greenlight Capital, has sliced by half the firm’s proportion of bets on rising stocks compared with a year earlier.
Canyon Capital Advisors has told investors it is largely holding off on an anticipated bet on beaten-down fixed-income investments, some focused on the distressed energy market. It isn’t yet comfortable enough to make such a move, a person familiar with the matter said. U.S. oil tumbled below $27 a barrel Wednesday. Canyon declined to comment.
“It’s just easier to be less exposed right now,” said Adam Taback, head of global alternative investments at Wells Fargo Investment Institute, which invests more than $10 billion in hedge funds.
Hedge funds have also been squeezed by steep drops in a small collection of stocks favored by the industry overall.
That group, which includes Facebook Inc. and General Motors Co., lost 9% in the first two weeks of the year, according to Goldman Sachs Group Inc., its second-worst drop over such a short stretch since October 2011.
All I know is these markets are a trader's paradise. Steve Cohen is loving them and so are other top hedge fund traders. But most hedge funds are going to get killed in these markets. It all reminds me of 2011 when extreme volatility confounded big funds.
One thing I can share with all of you is to be very careful trading these rallies, especially in energy and commodity stocks where you continue to see violent countertrend rallies which are mostly just short covering rallies. I stick with my comments from earlier this week and wish all of you investing and trading in these crazy volatile markets the best of luck.
As far as hedge funds, the jury is still out. Some will do well, most will get annihilated in these volatile markets. On that note, I'm heading back to trading my biotech stocks where I'm taking profits along the way. These markets make me nervous, there are too many itchy fat fingers, not to mention all the high frequency algos wreaking havoc on individual shares.
Enjoy your weekend and please remember to contribute (donate buton) or subscribe to my blog on the right side under my picture. If you want me to trade for your hedge fund, sure thing, just don't bug me with your academic risk managers because in this volatile environment, I'll clobber them if they breath down my neck! -:)
Below, George Soros comments on China's economic downturn during an interview with Bloomberg's Francine Lacqua at the World Economic Forum in Davos, stating a hard landing in China is practically unavoidable. Soros has warned of another 2008 crisis and here he discusses the risks of deflation spreading from China to rest of the world. Listen to his comments, very interesting.
Second, Bridgewater's founder Ray Dalio at Davos warns the Fed to "be hesitant, there are asymmetric risks" to tightening too quickly. Listen to his comments below.
Lastly, the SEC has barred Steve Cohen from a supervisory hedge fund role until January of 2018, reports CNBC's Kate Kelly, but his firm continues to post solid results, gaining 15.5% in 2015.
You got to hand it to the perfect hedge fund predator, he might have one Picasso too many, but he managed to escape those pesky SEC regulators and is doing just great with the new improved SAC Capital. In this volatile environment, Cohen and a few others are going to rake it in, but most hedge funds will perish.