Some funds gain, others lose in first quarter

Hedge fund industry observers said the first quarter of 2020 was a litmus test for managers, producing distinct winners and losers and many funds loitering in between.

"There was huge dispersion of returns between strategies and managers, including outliers with big returns as well as those near the bottom with sharply negative returns," said James A. Neumann, the New York-based CIO of hedge fund consultant Sussex Partners U.K. Ltd., in an interview.

Hedge Fund Research Inc. data found that performance losses of $333.2 billion were the primary culprit behind the 11% decline in hedge fund industry assets to $2.957 trillion in the quarter ended March 31 with the balance coming from $33.5 billion of net outflow.

The HFRI Composite index was down 9.4% in the quarter ended March 31.

Pensions & Investments looked into the performance of some of the most institutional hedge fund managers to see how they fared in the rough-and-tumble first quarter. Unless otherwise noted, the firms declined to comment on the record about their performance.

Among P&I's small universe of institutionally oriented firms, Brevan Howard Asset Management LP, London, produced the highest return in its flagship hedge fund.

The Brevan Howard Master Fund, a discretionary macro fund, returned 18.3% in March and 22.95% in the first quarter.

CEO Aron Landy said in an interview that the firm's "deep macro thinking," a portfolio structure that includes more than 40 portfolio managers who use derivatives to express their views, and "obsessive" firmwide risk management is "a combination of art and science."

In addition to the Master Fund, Brevan Howard runs 10 other strategies on its investment platform and Mr. Landy said "the pleasant thing about our secret sauce in this very volatile environment is that all of our funds are up this year. We made money even when the market was going down."

Brevan Howard manages $9.4 billion across its strategies.

Bridgewater Associates LP's flagship hedge fund, Pure Alpha, was down about 20% in the quarter ended March 31, the largest decline among the institutional hedge fund managers P&I looked at.

Greg Jensen, co-CIO of the Westport, Conn., based firm, said Bridgewater investment teams weighed the implications of the coronavirus in January and February and believed its historical stress tests of events, including past pandemics, suggested it was better to stay with their systematic process than override it.

"In hindsight, we wish we had handled this differently," Mr. Jensen said, because the portfolio's position was based on Bridgewater's view that central banks would be accommodating and that there would be sufficient liquidity, which was not the case at that time.

Mr. Jensen said losses in the fund in the first quarter were "consistent with the historic range of drawdowns" Bridgewater has experienced.

Bridgewater's Pure Alpha hedge fund strategy has been closed for some time and the "modest" redemption requests the firm has received has created "a bit of capacity," which may be taken up by investors on the company's waiting list, Mr. Jensen said.

Between performance losses and redemptions, Bridgewater's assets under management declined 12.5% to $140 billion.

All three of New York-based D.E. Shaw & Co. LP's multistrategy hedge funds produced positive returns in the quarter. The $8 billion D.E. Shaw Oculus Fund was up 8%; D.E. Shaw Valence Fund, with $3 billion under management, was up 1.8%; and the $16 billion D.E. Shaw Composite fund was up 1.9%.

All three funds have been closed to new investment for years, but D.E. Shaw recently opened the Composite Fund to new investment to "deploy in attractive investments given the current opportunity set," a source close to the firm said, adding that the firm capped the inflow at $2 billion.

D.E. Shaw manages about $50 billion across its strategies.

After struggling in the first half of March, Chicago-based multistrategy hedge fund manager Citadel LLC, Chicago, saw its flagship Wellington Fund rebound and return 1.2% in March and 5.7% in the first quarter, a source close to the firm said.

Citadel manages $30 billion, 70% of which is from institutional investors.

Some hedge funds managed by AQR Capital Management LLC, Greenwich, Conn., produced positive performance in the first quarter, said a source close to the firm.

The AQR Managed Futures Fund, for example, returned 3.25% in the first quarter and its specialist tail-risk strategy – AQR Diversified Convexity Fund – was up about 40% over the three-month period.

The hedge fund returns weren't enough to protect AQR from a decline of 23.1% in the quarter to $143 billion.

The firm's AUM decline in the quarter was performance-related, the source said, noting that the majority of AQR's assets are managed in traditional long-only strategies that are prone to decline in sharp market drawdowns.

Quantitative manager Renaissance Technologies LLC, East Setauket, N.Y., found that the beta models within Renaissance Institutional Equity Fund didn't perform well in volatile markets in March, according to a Bloomberg report.

The fund fell 14% in the quarter ended March 31, a source close to the firm said.

Renaissance manages about $80 billion.