Market turmoil fueled by the Russian invasion of Ukraine and rising inflation has sharply divided the hedge fund industry, with macro hedge funds celebrating one of their best starts to the year, while technology funds and growth accrue double-digit losses.
The top 10 percent of hedge funds gained an average of 24.3 percent in the first quarter, while the bottom decile fell 15.4 percent, according to HFR, which tracks the sector. The dispersion is one of the widest since the financial crisis.
The industry as a whole suffered losses of 0.3 percent during the first quarter, as measured by the HFRI fund-weighted index, with larger funds tending to outperform smaller ones.
“I find it hard to think of a more spread-out quarter in a long time,” said Michael Edwards, deputy chief investment officer at Weiss Multi-Strategy Advisers.
Many long-short equity hedge funds reduced their exposure to US stocks and reduced leverage when the market sold off in January and February, nervous there was more room for stocks to fall. They stayed on the sidelines and reduced positions further as the market finally found its footing, according to the main brokerage arm of Goldman Sachs.
It meant some funds missed out on a 9 percent rally in the S&P 500 from its February lows, including many of the tech stocks that had been hit hard earlier in the year. That sent the HFRI index for stock funds down 4 percent.
Tiger Global was one of the hardest hit, down 34 percent in the quarter. Melvin Capital, Whale Rock and RiverPark’s Long/Short fund all fell more than 20 percent in the quarter as consumer, technology and growth stocks struggled across the board. The woes with the technology weren’t limited to the US Accendo Capital lost 17.8 percent as one of its biggest holdings, Swedish telecoms maker Hexatronic, returned some of last year’s profits.
By contrast, macro and computer-driven funds rallied strongly, with the HFRI macroeconomic index rising more than 8 percent in the quarter.
Those gains, Edwards added, were due in part to the fact that quant macro funds traded consistently. Without human sensitivities to be affected by the war in Ukraine, the surge in Treasury yields and the sell-off in the markets, computer-driven funds re-entered the fray faster compared to some fund managers of meat and bone coverage.
“Machines are not subject to the same Fomo [fear of missing out] and the wound-licking tendencies that are discretionary managers,” he said.
Among the biggest winners this year is the BH-DG Systematic Trading fund, managed by a joint venture between hedge fund firm Brevan Howard and former Chase Manhattan trader David Gorton. The fund gained 23 percent through the end of March, according to figures sent to investors.
Meanwhile, Leda Braga’s Systematica rose nearly 18 percent, helped by bets on commodities and bonds, and Aspect Capital rose 21.5 percent in its Diversified fund.
Bridgewater, the world’s largest hedge fund with about $150 billion under management, gained 16.3 percent. He told investors that his best results were in commodities, short rates and nominal bonds.
Many of the winning funds use algorithms to predict and bet on trends and patterns in futures and other financial markets. They have benefited from a big sell-off in government bond markets this year, with yields on 2-year US Treasuries soaring from 0.7% to 2.4% and 10-year yields years jumping from 1.5% to 2.5%, as the Federal Reserve moves to tighten monetary policy.
“So far this year [performance] it’s spectacular,” said Philippe Jordan, president of Paris-based CFM, which manages about $9 billion and is up about 17 percent on its Discus strategy and 7 percent on its flagship Stratus fund. “The macro backdrop for [quant] futures trading is better than it has been in the last 10 years.”
The HFRI commodity fund index soared almost 25 percent, fueled by a one-third rise in the price of crude oil and a jump in natural gas of nearly two-thirds. Makuria Investment Management, which invests in commodities and companies involved in the energy transition, gained 31 percent. “The tragic events in Ukraine simply accelerated already existing structural trends in commodity markets. . . further increasing the narrowness of the market,” wrote founder Mans Larsson.
Other traders have also benefited from the big moves in the bond and currency markets. Odey Asset Management’s European fund gained nearly 61 percent through mid-March, helped by bets on rising long-term bond yields. He thinks they have a long way to go. “There’s nothing stopping returns from here,” said founder Crispin Odey.
Equity hedge funds had a much more difficult time. Funds that were positioned for higher prices suffered losses as equity markets were hit by the Ukraine war and the prospect of higher borrowing costs, and bond markets sold off quickly.
“The extreme volatility in the rates market and the Ukraine situation created a challenging risk environment across asset classes,” said Kevin Russell, chief investment officer of the hedge fund unit at UBS O’Connor, which manages more than $11.2 billion in assets.