Hedge fund growth crushed in choppy markets

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It was meant to be the year of the hedge fund. After near indiscriminate gains for shares in 2013, the choppier markets of this year were hailed as the perfect conditions for the specialist and skilled active fund manager.

It has not turned out that way. While equity markets in the developed world have gyrated, many of the world's most acclaimed stock pickers have underperformed. At the same time, the hedge funds that specialise in predicting the direction of the global economy have struggled as winning trades in interest rates and currency markets have gone into reverse.

"A lot of people were hoping this year would turn out to be a stockpickers' market, but that has turned out to be anything but the case so far," says Troy Gayeski, partner and senior portfolio manager at SkyBridge, a $10.3bn investor in hedge funds based in New York.

With the average hedge fund suffering the worst start to the year since the financial crisis, making just 1.2 per cent, according to the industry data provider Preqin, only a few managers, many concentrated in trading in concentrated company-specific events, have prospered.

"The best performing managers in equities this year have been those focused on corporate events, which is working out better than we expected," says Mr Gayeski.

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Of these, Bill Ackman, the manager of Pershing Square, has been the standout performer of 2014, with the his fund gaining 19.2 per cent in value up to the end of last month, making it one of the best performing large hedge funds in the world year-to-date.

Having suffered last year after his attempt to turn round the US retailer JC Penney soured, and his large public short of Herbalife inflicted large paper losses on his fund, Mr Ackman's bets on Botox maker Allergan, Platform Specialty Products and liquor company Beam have all surged in value.

Yet, aside from a small number of standout performances, the bulk of the world's best known equity hedge fund managers have struggled.

In Europe, several well-known hedge fund managers have suffered from difficult starts to the year after double-digit gains in 2013 as large and concentrated bets on equities have gone awry.

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The Mayfair-based Lansdowne Partners' $8bn Developed Market fund, which surged by 33 per cent last year helped in part by a large bet on airlines, has lost 7 per cent this year up to the end of last month. Meanwhile, Lansdowne's $1.2 bn Global Financials fund has lost almost a tenth of its value so far this year, wiping out almost half of the 23 per cent gain it reported in 2013. Crispin Odey, another London-based manager, has seen his Odey European fund lose 12 per cent to the end of April.

At the same time, so-called Global Macro hedge funds, which make bets on the direction of economies using currencies and interest rates, have suffered, with a shift in market expectations for the direction of interest rates and a sharp reversal in a big 2013 bet on Japan taking their toll on performance.

Brevan Howard, which manages $37 bn and is the world's third largest hedge fund by assets, has seen the value of its $27 bn Master Fund fall by 4 per cent up to the end of last month, driven by losses in US interest rate trading, and currencies, according to the fund's most recent letter to investors.

The Master Fund has never lost money in a calendar year in its entire history, with the hedge fund well known among investors for adhering to one of the strictest risk management operations in the industry, where traders are frequently fired if they suffer large losses.

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While last year, according to investor letters, Brevan Howard made money on the so-called "Japan trade" — which involved shorting the yen against the dollar as a bet on Japan's government's commitment to reflating its economy — the hedge fund and its peers have suffered as that trend reversed over the first quarter.

After making returns of 2.68 per cent last year, Alan Howard wrote that the performance was "somewhat disappointing", and pledged to his investors that "going forward, we will continue to 'press' winners, but recognise that we must also focus on better protecting gains".

Other large macro funds that are down for the year include two of the hedge fund world's most respected traders, Andrew Law's Caxton, which has lost 4.9 per cent year to date, and Louis Bacon's Moore Global fund, which is down by more than 5 per cent.

Yet, while many have suffered, some hedge funds that have withstood the general malaise have been those specialised in high-yield credit and asset-backed securities, who have managed in general to post strong returns in recent months.

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"Credit and asset-backed security traders, categorised by many as relative value managers, have also held up very well, and that has historically not been the case when equities are falling," says Anthony Lawler, portfolio manager at GAM, one of the world's biggest investors in hedge funds.

"The reason for this change is low bond yields have arguably brought new buyers to ABS. In a world where yields are so low, large institutional investors are more willing to buy and hold high-yield credit including ABS, and that has supported these investments even when equities have sold off."

Chenavari, a UK-based manager, has managed its asset-backed securities fund Toro to a 13 per cent return year-to-date. Michael Platt's $1.6 bn Bluecrest Multi strategy credit fund, another credit focused fund, rose by almost 6 per cent up to the end of last month.

--By Miles Johnson, FT.com