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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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Financial bubbles also lead to golden ages of productive growth

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Sir Alastair Morton had a volcanic temper. I know this because a story I wrote in the early 1990s questioning whether Eurotunnel’s shares were worth anything triggered an eruption from the company’s then boss. Calls were made, voices raised, resignations demanded. 

Thankfully, I kept my job. Eurotunnel’s equity was also soon crushed under a mountain of debt. Nevertheless, the company was refinanced and the project completed. I raised a glass to Morton’s ferocious determination on a Eurostar train to Paris a decade later.

With hindsight, Eurotunnel was a classic example of a productive bubble in miniature. Amid great euphoria about the wonders of sub-Channel travel, capital was sucked into financing a great enterprise of unknown worth.

Sadly, Eurotunnel’s earliest backers were not among its financial beneficiaries. But the infrastructure was built and, pandemics aside, it provides a wonderful service and makes a return. It was a lesson on how markets habitually guess the right direction of travel, even if they misjudge the speed and scale of value creation.

That is worth thinking about as we worry whether our overinflated markets are about to burst. Will something productive emerge from this bubble? Or will it just be a question of apportioning losses? “All productive bubbles generate a lot of waste. The question is what they leave behind,” says Bill Janeway, the veteran investor.

Fuelled by cheap money and fevered imaginations, funds have been pouring into exotic investments typical of a late-stage bull market. Many commentators have drawn comparisons between the tech bubble of 2000 and the environmental, social and governance frenzy of today. Some $347bn flowed into ESG investment funds last year and a record $490bn of ESG bonds were issued. 

Last month, Nicolai Tangen, the head of Norway’s $1.3tn sovereign wealth fund, said that investors had been right to back tech companies in the late 1990s — even if valuations went too high — just as they were right to back ESG stocks today. “What is happening in the green shift is extremely important and real,” Tangen said. “But to what extent stock prices reflect it correctly is another question.”

If the past is any guide to the future, we can hope that this proves to be a productive bubble, whatever short-term financial carnage may ensue.

In her book Technological Revolutions and Financial Capital, the economist Carlota Perez argues that financial excesses and productivity explosions are “interrelated and interdependent”. In fact, past market bubbles were often the mechanisms by which unproven technologies were funded and diffused — even if “brilliant successes and innovations” shared the stage with “great manias and outrageous swindles”.

In Perez’s reckoning, this cycle has occurred five times in the past 250 years: during the Industrial Revolution beginning in the 1770s, the steam and railway revolution in the 1820s, the electricity revolution in the 1870s, the oil, car and mass production revolution in the 1900s and the information technology revolution in the 1970s. 

Each of these revolutions was accompanied by bursts of wild financial speculation and followed by a golden age of productivity increases: the Victorian boom in Britain, the Roaring Twenties in the US, les trente glorieuses in postwar France, for example.

When I spoke with Perez, she guessed we were about halfway through our latest technological revolution, moving from a phase of narrow installation of new technologies such as artificial intelligence, electric vehicles, 3D printing and vertical farms to one of mass deployment.

Whether we will subsequently enter a golden age of productivity, however, will depend on creating new institutions to manage this technological transformation and green transition, and pursuing the right economic policies.

To achieve “smart, green, fair and global” economic growth, Perez argues the top priority should be to transform our taxation system, cutting the burden on labour and long-term investment returns, and further shifting it on to materials, transport and dirty energy.

“We need economic growth but we need to change the nature of economic growth,” she says. “We have to radically change relative cost structures to make it more expensive to do the wrong thing and cheaper to do the right thing.”

Albeit with excessive enthusiasm, financial markets have bet on a greener future and begun funding the technologies needed to bring it to life. But, just as in previous technological revolutions, politicians must now play their part in shaping a productive result.

john.thornhill@ft.com



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US tech stocks fall as government bond sell-off resumes

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A sell-off in US government bonds intensified on Wednesday, sending technology stocks sharply lower for a second straight day.

The yield on the 10-year US Treasury bond, which acts as a benchmark for global borrowing costs, climbed to nearly 1.5 per cent at one point. It later settled around 1.47 per cent, up nearly 0.08 percentage points on the day.

Treasury trading has been particularly volatile for a week now — 10-year yields briefly eclipsed 1.6 per cent last Thursday — but the rise in yields has been picking up pace since the start of the year and the moves have begun weighing heavily on US stocks.

This has been especially true for high-growth technology companies whose valuations have been underpinned by low rates. The tech-focused Nasdaq Composite index was down 2.7 per cent on Wednesday, on top of a 1.7 per cent drop the day before.

The broader S&P 500 fell by 1.3 per cent.

The US Senate has begun considering President Joe Biden’s $1.9tn stimulus package, with analysts predicting that the enormous amount of fiscal spending will boost not only economic growth but also consumer prices. The five-year break-even rate — a measure of investors’ medium-term inflation expectations — hit 2.5 per cent on Wednesday for the first time since 2008.

Inflation makes bonds less attractive by eroding the value of their income payments.

“I would expect US Treasuries to continue selling off,” said Didier Borowski, head of global views at fund manager Amundi. “There is clearly a big stimulus package coming and I expect a further US infrastructure plan to pass Congress by the end of the year.”

Mark Holman, chief executive of TwentyFour Asset Management, said he could see 10-year yields eventually trading around 1.75 per cent as the economic recovery gains traction later this year.

“It will be a very strong second half,” he said.

Line chart of Five-year break-even rate (%) showing US medium-term inflation expectations hit 13-year high

Elsewhere, the yield on 10-year UK gilts rose more than 0.09 percentage points to 0.78 per cent, propelled by expectations of a rise in government borrowing and spending following the UK Budget.

Sovereign bonds also sold off across the eurozone, with the yield on Germany’s equivalent benchmark note rising more than 0.06 percentage points to minus 0.29 per cent. This was an example of “contagion” that was not justified “by the economic fundamentals of the eurozone”, Borowski said, where the rollout of coronavirus vaccines in the eurozone has been slower than in the US and UK.

The tumult in global government bond markets partly reflects bets by some traders that the US Federal Reserve will be pushed into tightening monetary policy sooner than expected, influencing the costs of doing business for companies worldwide, although the world’s most powerful central bank has been vocal that it has no immediate plans to do so.

Lael Brainard, a Fed governor, said on Tuesday evening that the ructions in US government bond markets had “caught my eye”. In comments reported by Bloomberg she said it would take “some time” for the central bank to wind down the $120bn-plus of monthly asset purchases it has carried out since last March.

After a series of record highs for global equities as recently as last month, stocks were “priced for perfection” and “very sensitive” to interest rate expectations that determine how investors value companies’ future cash flows, said Tancredi Cordero, chief executive of investment strategy boutique Kuros Associates.

Europe’s Stoxx 600 equity index closed down 0.1 per cent, after early gains evaporated. The UK’s FTSE 100 rose 0.9 per cent, boosted by economic support measures in the Budget speech.

The mid-cap FTSE 250 index, which is more skewed towards the UK economy than the internationally focused FTSE 100, ended the session 1.2 per cent higher.

Brent crude oil prices gained 2 per cent at $64.04 a barrel.



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