January 29, 2019

Breakingviews: Hedge funds’ outperformance is small consolation

by Breakingviews.

Hedge funds lost less money for investors than the overall market last year. Meanwhile, the top 20 players managed to notch up $23 billion of gains, according to LCH Investments – though had to rely for more than half of that on just two funds: Ray Dalio’s Bridgewater Associates and James Simons’ Renaissance Technologies. The numbers offer the $3 trillion industry small consolation.

Some of the industry’s big names, including stock picker David Tepper’s Appaloosa Management, Stephen Mandel’s Lone Pine Capital and John Paulson’s eponymous firm, ended 2018 in the red. Collectively, all hedge funds drained their investors’ pockets last year, generating collective net losses of $41 billion, LCH estimates.

That’s barely 1 percent of industry assets, which isn’t bad considering the S&P 500 Index fell 6 percent last year. But the industry had spent years lagging badly behind a bull market, which in the eyes of many investors no longer justified the funds’ high fees. As a result, more hedge funds were liquidated than launched last year, causing the overall number of funds to decline for the first time in many years.

The industry’s pain is widespread. Bill Ackman’s Pershing Square ended 2018 with $6.8 billion in assets, less than half the total of three years earlier. Greenlight Capital’s assets have shrunk by more than three-quarters over the past four years. That prompted boss David Einhorn to reopen the firm to new investors recently, explaining that “we no longer believe there is risk of our assets growing too quickly.”

Even size and systematic trading strategies no longer ensure success. While Citadel and D.E. Shaw, like Bridgewater, used that formula to score healthy gains last year, AQR Capital failed despite having a similar profile. The firm’s publicly traded risk-parity strategy, a type of diversified portfolio pioneered by Bridgewater that typically contains leveraged bond holdings, fell almost 7 percent last year. For hedgies, the bear market appears to have already begun.

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