Hedge funds are on track for their best year since 2013 but continue to lag the broader market, adding to pressure on an industry that charges some of the highest fees in the investment world.
After failing to capture much of 2019’s strong rally in stocks and bonds, the hedge fund industry has delivered an overall return of 8.5 per cent this year, according to data from HFR.
Although it is the best performance in six years, it is still well behind the S&P 500’s 29.1 per cent gain this year. The US bond market, measured by a Bloomberg Barclays index, returned 14.5 per cent.
The relative underperformance raises further questions about hedge funds’ ability to make money in all market conditions: they lagged this year’s bull market but also fared worse than the market during 2018’s sell-off, despite having the ability to bet on falling prices.
Some of the largest hedge funds, including Ken Griffin’s Citadel and Steven Cohen’s Point72, are on track for double-digit returns this year, with the former up 16.7 per cent in the year to the end of November and the latter up 13.3 per cent over the same period. Another major multi-strategy hedge fund, Izzy Englander’s Millennium, which manages about $40bn in assets, was up 8.1 per cent.
However, other names are suffering outright declines. London-based Lansdowne Partners, for instance, is down about 4 per cent in its flagship hedge fund, while Crispin Odey’s Odey European fund is down about 19 per cent.
Some investors have tired of waiting for the type of outperformance that once made the industry famous. Compared with cheap, index-tracking funds, many hedge fund returns look mediocre.
“The last few years have been tough ones [for the hedge fund industry],” said Laurel FitzPatrick, head of the hedge funds practice at law firm Ropes & Gray. “If you’re shorting at all, the long-running bull market is tough competition.”
Some senior managers — including Louis Bacon of Moore Capital, the hedge fund he founded 30 years ago, and Jens-Peter Stein and Kornelius Klobucar’s Stone Milliner — told investors they would shut funds this year. Mr Bacon cited “disappointing results” in recent years.
“You have a generation of pretty senior folks who’ve been doing this for a while,” said Ms FitzPatrick. “The calculus changes for them when they don’t feel they’ve been reaching the returns they’re accustomed to getting for investors.”
While investors have yet to start abandoning the strategy in droves, they have pulled money out at the fastest rate since the financial crisis over the past four years, and the number of hedge funds has steadily declined after hitting a peak five years ago. That money has instead flowed into private equity and long-only strategies.
“I do hear some of that fatigue from investors,” said John McCormick, chief executive of Blackstone Alternative Asset Management, the private equity firm’s $81bn hedge fund unit. “For people who are really either significantly underfunded or struggling to put up returns, it’s hard to resist piling into equities or private credit.”
“There’s this big churn right now where you have some people who have said, ‘I just need to meet higher returns to reach my bogey, so I’m going to redeem’,” he said. “Then you have others who have had a great five years allocated to equities, and now they’re taking chips off the table and increasing their hedge fund allocation.”
However, ironically, the closures come just as signs are emerging that macro funds — whose returns are far less linked to the performance of the S&P — may be enjoying something of a revival. London-based Caxton Associates has gained about 18 per cent this year while Brevan Howard is up about 6.8 per cent.
Ken Tropin, chairman and founder of Graham Capital, a $15bn macro and quantitative hedge fund, said he expected next year to provide fertile trading opportunities around the US election, Brexit, the unresolved trade war with China and Christine Lagarde’s appointment as head of the European Central Bank.