Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

These big hedge funds got crushed in January

Hedge funds & the Japanese trade

Most hedge funds that bet on big economic trends lost money in January, hurt by reversing stock markets and wrong-way currency bets.

Some of the hedge fund industry's most prominent names were among the losers for the month.

A prime example was Caxton Associates's Caxton Global Investment fund, which fell 1.2 percent through Jan. 31. Andrew Law's $7.7 billion New York based firm was hurt—like many others—by being long Japanese stocks and short the yen, according to a person familiar with the positioning. The Japanese Nikkei 225 fell 8.45 percent in January after steep gains in 2013. The yen gained nearly 3 percent in January after sharp declines last year.

Caxton was able to stem further losses by cutting risk as the trades went awry and benefited from shorts on the Canadian dollar, according to the person. A spokeswoman for Caxton declined to comment.

Japan: A hot trade gone cold?

(Read more: Hedge fund betting on a $200 billion Alibaba)

Another recent macro loser was Brevan Howard Asset Management, Alan Howard's London-based $40 billion hedge fund firm. The flagship Brevan Howard Fund fell 1.38 percent through. According to an investor, the fund was positioned to start the year long Japanese and other stocks and short the yen, Turkish lira, Mexican peso and other currencies.

A spokesman for Brevan Howard did not immediately respond to a request for comment.

James Melcher's $1.5 billion Balestra Capital was also hurt by the so called Japan "reflation" trade. Its flagship fund fell 2.94 percent.

"Generally, we would say that macro funds were hit by Japan selling off two to three times to U.S. markets in January, and this is the reason for the bulk of our losses," said Lydia Bell, an investor relations executive at New York-based Balestra. "Hedges in the portfolio definitely helped, but mostly this was a reversal in sentiment and position shift broadly."

Some investors in hedge funds are disappointed.

"Macro funds performed rather poorly—they generally had a lot of risk-on coming into the new year and got caught flat- footed when things reversed," said Norman Kilarjian, who tracks macro hedge funds for institutional investment consultant Aksia.

"Unfortunately, many of the positions that hurt them—long Japanese and U.S. stocks, short U.S. bonds, short the yen—were pretty consensus and fairly extended by the end of Q4. They should've taken some profits."

Others were more sanguine.

"People like to think of macro as a hedge and most managers are bearish at their core. But unfortunately they were long equities recently and got hurt," said Chris Solarz, head of macro hedge fund research at investment consultant Cliffwater.

"Macro is generally an uncorrelated strategy, but investors sometimes rely on it too much for negative correlation like what happened in January. This is just a bad data point," he added.

Other macro fund losers in January include:

  • $150 billion Bridgewater Associates' Pure Alpha I fund (down 0.15 percent);
  • $8 billion MKP Capital Management's MKP Opportunity Fund (down 3.33 percent);
  • $56 billion BlueBay Asset Management's BlueBay Macro Fund (down 3.42 percent);
  • $15 billion Discovery Capital Management's Global Macro Fund (down 1.2 percent);
  • $58 billion Fortress Investment Group's Fortress Macro Fund (down 4.26 percent through January 24);
  • $13.7 billion Tudor Investment Corp.'s Tudor Global Fund (down 2.1 percent);
  • $14.9 billion Moore Capital Management's Moore Global Investment fund (down 1.1 percent through Jan. 23).

Spokesmen for MKP, BlueBay, Discovery, Bridgewater, Moore and Tudor declined to comment. A representative for Fortress did not immediately respond to a request.

Data released by UBS's hedge fund servicing unit on Feb. 4 shows that macro funds were generally selling stock holdings in response to the losses. The report also noted that most of the funds' foreign exchange bets went against them, including popular trades such as long the U.S. dollar vs. short the yen and short the U.S. dollar versus long the Mexican peso.

Of course, not every macro fund lost money.

One example is the Omni Macro Fund, managed by $800 million London-based firm Omni Partners, which gained 3 percent in January, according to a person familiar with the returns.

"We have held the view for some time that equity markets are very expensive at current levels," said Stephen Rosen, chief investment officer of the fund. "This, coupled with a number of positioning indicators suggest an extremely overbought and over-owned equity market, meant we came into 2014 short."

Rosen said his fund gained from shorts on U.S. small-cap stocks and Brent crude oil and a long position in the U.S.dollar versus the South African rand, which fell in January when the government hiked interest rates.

(Read more: No January jitters thanks to Fed: Hedge fund pro)

Observers weren't surprised by the losses given the quick reversal of markets in January.

"Macro funds generally invest in broad markets—stocks,bonds, (foreign exchange), yield curve, etc.—and generally need a large and sustained movement in one or several markets in order to generate significant returns," said Eric Siegel, head of hedge fund research and management at Citi Private Bank.

"Range-bound markets can be much more difficult to navigate. Equity long/short and other fundamental strategies rely on the dispersion between cheap and expensive securities to generate returns. Those strategies have the potential to generate attractive returns regardless of big moves in broad markets."

—By CNBC's Lawrence Delevingne. Follow him on Twitter @ldelevingne.