Who could have predicted the rise of populism? Britons choosing to turn their backs on the European Union, Americans opting for Donald Trump as the next U.S. president, and Italians sticking with the status quo forcing the reformist Prime Minister Matteo Renzi to quit.
Surely, the brains behind the multibillion-dollar hedge fund industry could show the rest of us how to navigate uncertain times? Or would 2016 be another bad year for the industry? Who will find themselves on the naughty step and who went into battle on the behalf fo their investors? CNBC takes a look at the year that was for the hedge fund industry.
Coming off a disappointing 2015 for flows and performance, hedge funds were hoping for a strong start to the new year. Yet this was not to be as markets and managers were roiled by plunging risk appetites driven primarily by concerns over global economic growth, oil and the stability of China. Frayed nerves and deteriorating confidence led to investors pulling $21.5 billion from hedge funds during the month while poor performance accounted for total industry assets shrinking by an additional $43.2 billion (according to data provider eVestment). Former SAC Capital boss Steve Cohen hit the news for picking up a Securities and Exchange Commission (SEC) ban on managing client's money until 2018 due to insider trading charges, as he proceeded with growing his new family office fund, Point72. Meantime, Perry Capital let some traders go and Pershing Square's Bill Ackman wrote to investors apologizing for the fund's recent poor performance.
Argentina took an important step towards being welcomed back into the arms of international investors as its new government struck a deal with a group of "holdout" creditors. Meanwhile, Citadel cut its ranks and OrangeCapital shuttered its doors after a decade. The event-driven hedge funds cited concerns over shriveling liquidity in credit markets when it handed back around $1 billion to investors.
Bridgewater anointed ex-Apple exec Jon Rubenstein as the selected successor to founder Ray Dalio, supplanting Greg Jensen in the process. While biding his time during the decade-long transition phase before taking the reins at the world's largest hedge fund, Rubenstein stepped in as co-chief executive officer. In other moves during the month, Citadel poached Morgan Stanley's Nicola White for its fixed income, currencies and commodities group while Millennium snapped up Bob Jain, Credit Suisse's asset management boss. Meantime, John Paulson challenged Premier Foods in its refusal to enter talks with McCormick's over the spice company's interest in combining the firms.
Regulators got busy in April as the Financial Stability Oversight Council launched a working group to review whether certain hedge funds could be considered "systemically important" and thereby threaten broader financial stability. This happened as the Hedge Fund Standards Board agreed with the International Forum of Sovereign Wealth Funds to pursue measures designed to simultaneously improve governance standards and the relationship between hedge fund clients and managers. The latter licked their wounds after more than $7 billion was yanked from funds during the first quarter, according to Hedge Fund Research, making it the worst three-month period in the past seven years.
MetLife, the U.S.'s largest insurer by assets, followed a path laid out by other large dissatisfied institutional investors in recent months when it announced a significant reduction – around 70 percent over two years – to its hedge fund allocations in May, blaming inconsistent performance. Meanwhile, Chris Hohn's TCI wrote to Volkswagen management demanding a wholesale rethink of compensation levels and the process for determining them, blaming the encouragement of risk-taking for the diesel emissions saga. Famed investor, Warren Buffett warned of what he perceived as the "stupidity" of investing in hedge funds during the annual meeting of his Berkshire Hathaway group.
Hedge funds, along with the rest of the world, succumbed to Brexit fever with many funds choosing to take risk off the table in the lead-up to the vote. Some managers said they saw more potential downside in the case of taking the wrong bet on the well-flagged event than potential upside in the case of correctly estimating the outcome. Some of the more intrepid funds commissioned exit polls seeking a more scientific basis for forecasting the result. Overall, the industry did not demonstrate particularly impressive powers of prediction. Only 11 percent of the hedge funds surveyed by Preqin immediately prior to polling correctly foresaw the 'Leave' vote winning. Odey Asset Management and Marshall Wace emerged strongly from the turbulence following the result's announcement having placed a series of shorts on U.K. equities ahead of the referendum.
The performance spotlight shifted from hedge funds to open-ended U.K. property funds, which suffered such dramatic sell-offs in the wake of Britain's EU referendum that several were compelled to prevent investors from redeeming their assets. Meanwhile, Man Group's Manny Roman stepped down from his London hedge fund CEO role to assume the same mantle at the Californian asset manager, PIMCO. This followed a shake-up of Man Group's top ranks the previous month when Jonathan Sorrell had stepped up to take the co-presidency position alongside Luke Ellis. After Roman's departure, Ellis stepped into the vacant CEO role. Meantime, activist hedge fund Elliott Management stepped up its challenge to AB InBev regarding its bid for British brewer, SAB Miller.
The New Jersey Investment Council – responsible for state pensions – slashed its hedge fund allocation from 12.5 percent to 6 percent for 2017. The Council's decision-makers cited their high sensitivity to widespread displeasure over fees and expenses in explaining the move. After a challenging period for both the wider industry and some of its own investments, private equity group Carlyle considered pulling out of hedge funds.
Och-Ziff was fined $412 million by U.S. authorities to resolve an investigation into allegations dating back to 2008 that it bribed officials across several African countries. This came alongside news that fines from U.S. regulator, the Securities and Exchange Commission (SEC), had hit record levels this year. In other disciplinary news, Omega's Leon Cooperman was charged with insider trading by the SEC.
Hedge funds got caught up in the Deutsche Bank crisis following a $14 billion claim made on the German lender by the U.S. Department of Justice regarding the mis-selling of mortgage-backed securities. Shorting the bank's stock became a hugely popular trade, ensuring Deutsche's share price languished close to its late September lows for the first half of October. Rumors that some funds were also seeking to reduce their business with the lender due to counterpart concerns abounded early in the month before the situation stabilized.
Some – but not all – hedge funds made hay in the aftermath of the U.S. election, benefitting from the strong performance of value and healthcare stocks and seeking to rapidly rotate into sectors, such as financials, where they had found themselves under-allocated heading into the general election. Goldman Sachs launched an exchange-traded fund (ETF) which sought to track the 10 stock selections appearing most frequently in its hedge fund portfolios.
Private equity behemoth Blackstone shut its Senfina hedge fund after it shed almost a quarter of its value in the year-to-date, despite being one of the top performing funds during 2015. As the net number of hedge fund closures looks set to rank as the worst since 2008, performance data showed event-driven – particularly distressed debt houses – and relative value strategies posted the best year-to-date returns while macro funds turn in the least impressive results.