Alpha is back with most hedge funds outperforming in January, Bank of America says

Published Thu, Feb 3 202211:20 AM ESTUpdated Thu, Feb 3 202211:30 AM EST

January's spike in market volatility and meltdown in growth stocks turned out to be the perfect environment for hedge funds to prove their mettle. All major hedge fund categories outperformed the overall market in January, according to data from Bank of America. The hedge-fund community beat the market at a time when wild price swings gripped Wall Street as investors processed the Federal Reserve's upcoming policy shift . The S & P 500 dropped more than 5% for its worst month since March 2020, while the tech-heavy Nasdaq Composite dipped into correction territory, or falling more than 10% from its record high. "Alpha is back," Savita Subramanian, the bank's head of U.S. equity and quantitative strategy, said in a Feb. 2 note. "Almost every type of active fund delivered alpha." Funds least correlated with the market delivered the strongest returns in January, according to Bank of America. Market-neutral hedge funds performed the best in January, outperforming the Russell 1000 by more than six percentage points, according to Bank of America. Macro-systematic also did particularly well, beating its benchmark by over five percentage points, the bank said. At the beginning of the year, surging bond yields triggered hedge funds to sell growth-focused technology shares at a speed not seen in the past decade, according to Goldman Sachs' prime brokerage data. Tech stocks are seen as sensitive to rising yields because increased debt costs can hinder their growth and can make their future cash flows appear less valuable. The move seemed to be prescient as technology names bore the brunt of the sharp sell-off last month. Shares of Tesla dropped 11% in January, while Netflix tanked 29% in one single month and Amazon fell 10%. Some of the star managers started buying the dip in growth names. Pershing Square's Bill Ackman revealed on Jan. 26 that he purchased more than 3.1 million shares of Netflix following a steep decline, which makes him a top-20 shareholder. The stock has climbed about 20% since Ackman's announcement. Meanwhile, Greenlight Capital's David Einhorn struck gold with his new bet on Global Payments . The hedge fund manager revealed in a new investor letter that he added a new large long position in the payments company during the fourth quarter, betting on the ongoing consumer preference shifts to electronic payments. Shares of Global Payments jumped close to 11% in January following a near 14% rally in December.

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Brendan McDermid | Reuters

January's spike in market volatility and meltdown in growth stocks turned out to be the perfect environment for hedge funds to prove their mettle.