Daniel Loeb's Third Point fell around 20 per cent in the first half of the year, having lost money on stocks including software firm SentinelOne and electric-vehicle maker Rivian Automotive, according to investor documents. And Skye Global, set up by former Third Point analyst Jamie Sterne, fell more than 35 per cent in the first half of this year after losing 10.4 per cent in June, according to numbers sent to investors.
In a note to clients, seen by the Financial Times, Sterne said the fund's strong run of performance over nearly six years "was emphatically broken [in the second quarter of 2022] with extremely poor performance". The fund, which is still up an annualised 30 per cent since launch, was hit by a large position in Amazon. Amazon had been down 36 per cent in the year to June, but has since cut its losses to about 19 per cent.
Not all funds have suffered. Some managers such as Brevan Howard trading moves in government bonds and currencies, oil traders like Pierre Andurand and quant funds betting on market trends have made big gains this year. That has helped buoy the US$4t industry's average returns, which are well ahead of equity markets.
Nevertheless, the performance from many other funds marks a disappointment for investors who had harboured high hopes that, after years of lacklustre returns over the past decade, rising interest rates and choppier markets could allow managers to prove their worth. Sparkling performance in 2020 appeared to signal a return to a golden age of trading.
Instead, funds lagged well behind the market last year, and have in the case of many long-short funds looked ill-equipped to deal with Wall Street's S&P 500 falling 13 per cent, including dividends, in 2022 so far. "Some funds should have dropped the term 'hedge' a long time ago," said Andrew Beer, managing member at US investment firm Dynamic Beta.
Long-short funds are "not what you want to have in this market", said Patrick Ghali, managing partner at Sussex Partners, which advises clients on hedge funds, adding that he prefers strategies that provide more diversification.
There are already signs that the losses are deterring investors, many of whom were already wary of hedge funds. Having received a net US$13.92 billion of inflows last year, hedge funds attracted just US$440 million in the first quarter of this year, including a large outflow in March, according to data group eVestment.
And data from fund administrator Citco show that funds suffered more than US$10.1b of outflows in June, with redemptions of US$7.8b expected for the third quarter and US$6.4b for the end of the year.
Washington University's Wilson decided several years ago to cut his fund's allocation to hedge funds from about 20 per cent of the portfolio, and has now reduced it to around 5 per cent.
He says that there is a "portfolio construction problem" with these funds. First, holding a basket of hedge funds can leave an investor effectively owning a huge number of long and short equity positions that can resemble the market, meaning that they would be better served simply owning cheaper index trackers. Second, if one hedge fund makes money and a second fund loses a similar amount, the investor still ends up paying the first fund manager a performance fee.
Other investors are also taking action. Dutch pension fund ABP has been reducing its exposure to hedge funds and assessing which strategies it can carry out in-house, rather than allocating to an external manager, as a way of reducing costs and improving control.
However, the weak performance does not appear to have dented the industry's own confidence in its ability to attract investors.
A survey of 100 hedge funds managing US$194b by technology firm SigTech found that 23 per cent expected a dramatic increase in institutional investors' allocations to hedge funds over the next two years and a further 60 per cent expecting a slight increase. Only 4 per cent expected investor allocations to fall.
Written by: Laurence Fletcher
© Financial Times