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Covid crisis opens chasm between hedge fund winners and losers

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The Covid-19 crisis has created the widest gulf in performance between top and bottom hedge funds in more than a decade, with sharp gains generated by several managers helping to revive interest in the industry.

Ructions that rippled through global markets in early 2020, followed by the enormous rebound rally opened opportunities not seen since the 2008-09 financial crisis. But that same wave of volatility also wrongfooted a clutch of the sector’s biggest names.

The top 10 per cent of hedge funds recorded average returns of 49 per cent over the 12 months to the end of November, the best performance since 2009, according to data group HFR. At the same time, however, the gap between the top and bottom deciles widened to 68.9 percentage points, marking the biggest difference in 11 years.

“Plenty of hedge funds nailed 2020,” said Andrew Beer, managing member at US investment firm Dynamic Beta Investments. Many “had their best year since the great financial crisis”.

Such performance is more reminiscent of the hedge fund industry’s ‘golden age’ before the crisis triggered waves of stimulus measures from central banks that dulled volatility, several industry participants said. The strong run by top funds has ignited renewed investor interest after years of lacklustre returns, they said. “Hedge funds have become investable again,” said one hedge fund investor.

Another investor described a “wall of money trying to get into hedge funds” next year, but added that some may struggle to place funds with their desired managers if they chose to close to new investments.

Column chart of Dispersion between top and bottom deciles of returns (percentage points) showing Pandemic widens gap in hedge fund performance

The winners . . . 

Pershing Square’s Bill Ackman, Caxton Associates’ Andrew Law and Saba Capital’s Boaz Weinstein are among the biggest winners from this year’s market swings. For managers positioned the right way, precipitous falls followed by even bigger rebounds in some assets provided the kind of moneymaking opportunities rarely seen in a largely-becalmed decade dominated by central bank bond-buying.

Directional bets as investors dumped risky assets in favour of havens in February and March were some of the most lucrative trades. Mr Law’s Caxton made a record 40 per cent gain, boosted by bets on government bonds, according to an investor, while Brevan Howard gained 24 per cent.

Lan Wang Simond’s Mandarin Offshore fund returned almost 28 per cent, bolstered by bets on technology stocks and by cushioning itself against the March market turmoil. Former Third Point analyst Jamie Sterne’s New York-based Skye Global gained 63.8 per cent, also helped by trading in and out of soaring technology stocks, according to numbers sent to investors, while Daniel Loeb’s bullish call on the US election helped him to a quick $400m profit and a 19.1 per cent gain this year.

Pierre Andurand’s Andurand Commodities made 64.6 per cent and his Discretionary Enhanced fund, which can take more risk, gained 152 per cent, after predicting oil prices would turn negative, while Vancouver-based Delbrook Capital surged 109 per cent, helped by bets on M&A in the gold sector.

Billionaire Jeffrey Talpins’ $17bn-in-assets Element Capital, which made a prescient prediction on the efficacy of the Pfizer Covid-19 vaccine, gained 15 per cent. Massi Khadjenouri’s Kite Lake Event-Driven fund notched up returns of 7.1 per cent. Izzy Englander’s $48.5bn-in-assets Millennium Management gained 23.3 per cent, while Connecticut-based Verition Fund Management made 26.5 per cent.

Leda Braga of Systematica, Andrew Law of Caxton Associates and Pierre Andurand, whose riskiest fund gained 152 per cent © Bloomberg; Rosie Hallam

Buying protection against the sell-off was also highly profitable. Saba’s Mr Weinstein profited from a well-timed bet against junk bonds, as well as trading mispricings in firms’ capital structures, to gain 70.8 per cent, according to numbers sent to investors. Mr Ackman’s Pershing Square Holdings made 65 per cent, bolstered by a $2.6bn profit on credit default insurance, while 36 South’s $2bn Kohinoor fund, which buys option protection, is up about 73 per cent, despite some losses since March.

Several quant funds, whose trading is based on computer algorithms, also managed to outperform in a mostly gloomy year for the investment strategy. Systematica’s BlueTrend fund, run by Leda Braga, has gained 7.6 per cent this year.

Qube Research & Technologies, a $3bn hedge fund that span out of Credit Suisse nearly three years ago, is enjoying its strongest year on record, said a person familiar with its performance. And, despite several funds losing money trading over-the-counter markets, where liquidity sometimes dried up, Gresham Investment Management’s ACAR fund gained 8.5 per cent.

The losers . . . 

This year’s volatility also caught out some of the sector’s biggest names.

Billionaire Michael Hintze suffered a $1.4bn loss, driven by bad structured credit bets, in his flagship Directional Opportunities fund. He gained nearly 9 per cent in November, reducing losses this year to about 36 per cent, according to an investor update seen by the Financial Times.

It has been “arguably the most turbulent year in financial markets for a generation”, Sir Michael wrote in a recent letter to investors, also seen by the FT. He has repositioned CQS to profit from new opportunities and strengthened the firm’s senior management.

David Harding’s Winton Group, which made a controversial decision several years ago to move away from a style of computer-driven trading Mr Harding helped develop in the 1980s, suffered a 22 per cent fall in its main fund.

And in the US, Jim Simons’ Renaissance Technologies, widely regarded as one of the world’s top hedge fund firms, lost 33.3 per cent in its Institutional Diversified Alpha fund and 22 per cent in its Institutional Equities fund. Ray Dalio’s Bridgewater took a hit with its flagship Pure Alpha fund down more than 10 per cent, even as its All Weather fund has recorded gains. Machine learning specialist Voleon is down 8 per cent in its Investors fund, while its Institutional fund is flat.

laurence.fletcher@ft.com



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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European markets recover after tech stock fall

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European equities rebounded from falls in the previous session, when fears of a US interest rate rise sent shares tumbling in a broad decline led by technology stocks.

The Stoxx 600 index gained 1.3 per cent in early dealings, almost erasing losses incurred on Tuesday. The UK’s FTSE 100 gained 1 per cent.

Treasury secretary Janet Yellen said at an event on Tuesday that rock-bottom US interest rates might have to rise to stop the rapidly recovering economy overheating, causing markets to fall.

Yellen then clarified her remarks later in the day, saying she did not think there was “going to be an inflationary problem” and that she appreciated the independence of the US central bank.

Investors had also banked gains from technology shares on Tuesday, after a strong run of quarterly results from the sector underscored how it had benefited from coronavirus lockdowns. Apple fell by 3.5 per cent, the most since January, losing another 0.2 per cent in after-hours trading.

Didier Rabattu, head of equities at Lombard Odier, said that while investors were cooling on the tech sector, a rebound in global growth at the same time as the cost of capital remained ultra-low would continue to support stock markets in general.

“I’m seeing a healthy correction [in tech] and people taking their profits,” he said. “Investors want to be much more exposed to reflation and the reopening trades, so they are getting out of lockdown stocks and into companies that benefit from normal life resuming.”

Basic materials and energy businesses were the best performers on the Stoxx on Tuesday morning, while investors continued to sell out of pandemic winners such as online food providers Delivery Hero and HelloFresh.

Futures markets signalled technology shares were unlikely to recover when New York trading begins on Wednesday. Contracts that bet on the direction of the top 100 stocks on the technology and growth-focused Nasdaq Composite added 0.2 per cent.

Those on the broader S&P 500 index, which also has a large concentration of tech shares, gained 0.3 per cent.

Franziska Palmas, of Capital Economics, argued that European stock markets would probably do better than the US counterparts this year as eurozone governments expand their vaccination drives.

“While a lot of good news on the economy appears to be already discounted in the US, we suspect this may not be the case in the eurozone,” she said.

Brent crude, the international oil benchmark, was on course for its third day of gains, adding 0.7 per cent to $69.34 a barrel.

Despite surging coronavirus infections in India, the world’s third-largest oil importer, “oil prices have moved higher on growing vaccination numbers in developed markets”, said Bank of America commodity strategist Francisco Blanch.

Government debt markets were subdued on Wednesday morning as investors weighed up Yellen’s comments with a pledge last week by Federal Reserve chair Jay Powell that the central bank was a long way from withdrawing its support for financial markets.

The yield on the 10-year US Treasury bond, which moves inversely to its price, added 0.01 of a percentage point to 1.605 per cent.

The dollar, as measured against a basket of trading partners’ currencies, gained 0.2 per cent to its strongest in almost a month.

The euro lost 0.2 per cent against the dollar to purchase $1.199.



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Yellen says rates may have to rise to prevent ‘overheating’

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US Treasury secretary Janet Yellen warned on Tuesday that interest rates may need to rise to keep the US economy from overheating, comments that exacerbated a sell-off in technology stocks.

The former Federal Reserve chair made the remarks in the context of the Biden administration’s plans for $4tn of infrastructure and welfare spending, on top of several rounds of economic stimulus because of the pandemic.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” she said at an event hosted by The Atlantic magazine.

“So it could cause some very modest increases in interest rates to get that reallocation. But these are investments our economy needs to be competitive and to be productive.”

Investors and economists have been hotly debating whether the trillions of dollars of extra federal spending, combined with the rapid vaccination rollout, will cause a jolt of inflation. The debate comes as stimulus cheques sent to consumers contribute to a market rally that has lifted equities to record levels.

Jay Powell, the Fed chair, has said that he believes inflation will only be “transitory”; the central bank has promised to stick firmly to an ultra-loose monetary policy until substantially more progress has been made in the economic recovery.

The possibility of interest rates rising has been a risk flagged by many investors since Joe Biden’s US presidential victory, even as markets have continued to rally.

Yellen’s comments added extra pressure to shares of high-growth companies, whose future earnings look relatively less valuable when rates are higher and which had already fallen sharply early in Tuesday’s trading session. The tech-heavy Nasdaq Composite was down 2.8 per cent at noon in New York, while the benchmark S&P 500 was 1.4 per cent lower.

Market interest rates, however, were little changed after the remarks, with the yield on the 10-year Treasury at 1.59 per cent. Yellen recently insisted that the US stimulus bill and plans for more massive government investment in the economy were unlikely to trigger an unhealthy jump in inflation. The US treasury secretary also expressed confidence that if inflation were to rise more persistently than expected, the Federal Reserve had the “tools” to deal with it.

Treasury secretaries generally do not opine on specific monetary policy actions, which are the purview of the Fed. The Fed chair generally refrains from commenting on US policy towards the dollar, which is considered the prerogative of the Treasury secretary.

Yellen’s comments at the Atlantic event were taped on Monday — and she used the opportunity to make the case that Biden’s spending plans would address structural deficiencies that have afflicted the US economy for a long time.

Biden plans to pump more government investment into infrastructure, child care spending, manufacturing subsidies and green energy, to tackle a swath of issues ranging from climate change to income and racial disparities.

“We’ve gone for way too long letting long-term problems fester in our economy,” she said.



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