Macro Hedge Funds Had A Great Year
After 2008, when markets were frozen by trillions of dollars of central bank bond purchases, so-called macro hedge funds, made famous by people like George Soros and Louis Bacon, went through a dry spell.
But this year, as the US Federal Reserve and other central banks confront surging inflation, they have thrived as a result of seismic changes in the world's bond markets, market choppiness and a bull run in the dollar.
- One of the winners was Chris Rokos, who used trades on rising interest rates to recover from losses last year and earn 45.5% in 2022
- An investor claims that Caxton Associates' $4.3 billion Macro fund, which is closed to new money, gained 30.2% as of mid-December
- On the back of trading on bonds and commodities, Haidar Capital's Jupiter fund has increased by 194% after peaking this year at more than 270%
Commodity And Energy Funds Also Won Big
Hedge funds focussed on commodities, basic materials and energy have benefited greatly from this year's extraordinarily volatile commodities markets, producing some of the year's biggest profits.
- The flagship fund of e360 Power LLC, a Texas company that employs futures and options to trade power, natural gas and emissions, has increased by more than 125% this year through September, more than doubling its initial investment
- In the same time frame, the oil-focused fund of Westbeck Capital Management LLP has increased by around 41%, while two Westbeck funds focusing on the energy transition have increased by about 14% and 15%.
Portfolio manager Mark Sickafoose at e360 Power attributed the company's performance to rising electricity prices in the US during the first half of the year.
Many Tech Managers Got Burnt
These returns are in stark contrast with tech hedge funds' performance, many of which have had a terrible year as a result of rising interest rates, which sent the valuation of high-growth but unprofitable technology firms plunging.
- One of the largest beneficiaries of the skyrocketing tech stocks at the height of the coronavirus outbreak was Chase Coleman's Tiger Global, but it lost 54% this year
- Whale Rock, a tech-focused fund with offices in Boston, suffered a loss of 42.7%
- In addition, Skye Global, founded by former Third Point analyst Jamie Sterne, dropped 40.9% as a result of falling shares of Alphabet, Microsoft, and Amazon. Sterne acknowledged his error over the "severity of the macro risks" in an investor letter
“Our largest disappointment came from those managers, even well-known ones with long track records, who failed to anticipate the impact of rising rates on growth stocks, [...] They didn’t recognise the paradigm shift and buried their heads in the sand.” Cédric Vuignier, head of liquid alternative managed funds and research at SYZ Capital for the Financial Times
A notable exception is Andreas Halvorsen’s Viking, which moved out pricey tech stocks early in the year and lost only 3.3% up until mid-December.
So Are Hedge Funds The Answer?
After a sumptuous year, investors may be tempted to get back into hedge funds and their advanced strategies to get an edge. Yet, their returns may be very asymmetric year on year. On top of this, their strategies may loose steam in the long run, prompting investors outflows.
This can be illustrated with Crispin Odey, a London-based hedge fund manager known for his bear takes on markets and his successes during the 2008 financial crisis.
- In 2022, the manager was up 152% and has now completely recovered losses incurred between 2015 and 2020
- However, the recovery occurs just as the majority of his investors had left. At the end of November, the assets of his hedge fund, which peaked in 2015 with $1.8 billion in assets, were at $346 million today
Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. Please note that the writer of this article is not registered as a financial advisor.