Raucous year sees hedge fund assets decline 3.1%

During a tumultuous year through June 30, aggregate assets under management worldwide by hedge fund managers with an institutional orientation fell 3.1% compared to the prior year.

Assets under management in single and multistrategy hedge funds worldwide totaled $1.26 trillion as of June 30, down from $1.3 trillion as of the same date a year earlier, according to an analysis of data from 107 firms for Pensions & Investments' 11th annual hedge fund special report.

In 2019, P&I's universe of hedge fund managers numbered 111.

By comparison, aggregate assets of worldwide hedge fund in the year ended June 30, 2019, were down 2.7% after three prior years of net growth, P&I's historical survey data shows.

Volatile markets and numerous dislocations in sectors around the world since February caused by the COVID-19 pandemic created ideal conditions for many hedge fund managers to produce solid returns in the first half of 2020, hedge fund observers said.

"It's been an interesting year, which tested the true diversification benefits of hedge funds. The fallout from the pandemic created numerous diverse outcomes for hedge fund managers," said Victoria Vodolazschi, New York-based director, investments and hedge fund research at Willis Towers Watson PLC.

"In the first quarter, macro strategies did very well while anything with beta, activist or long-oriented strategies did not," Ms. Vodolazschi said, noting that macro managers "can take advantage of growth and inflation at different speeds across different markets."

Other hedge fund approaches that did well in the first half of 2020 included fixed-income hedge funds that include a broader range of assets including commodities and foreign-exchange instruments as well as systematic trend-following strategies employing shorter-term trading tactics, Ms. Vodolazschi said.

By another survey measure, 47% of hedge fund managers in P&I's 2020 universe reported AUM growth in the year ended June 30 from net flows and investment performance compared to 40% in the prior year.

One-third of survey respondents had lower AUM in 2020 compared to 39% in the previous year, while the AUM of 2% of hedge fund managers was flat compared to 4% of managers a year earlier. Firms new to P&I's annual survey or those without comparative data from the prior year represented 18% of respondents.

Aggregate global AUM of hedge fund managers in both of P&I's 2020 and 2019 rankings was down 1.7% to $1.16 trillion.

Industry observers said global market turmoil caused by COVID-19 in the first half of 2020 profoundly changed the outlook for hedge fund managers.

"The first half of 2020 couldn't have been more different than the latter half of 2019," said Kenneth J. Heinz, president of hedge fund index provider Hedge Fund Research Inc., Chicago.

"2019 was the easiest year in which to make money because everything was going up," Mr. Heinz said in reference to all money managers, noting that in contrast, "the first quarter of 2020 was a story of huge outperformance by hedge funds. The return of the HFRI Fund Weighted Composite index in the first quarter was down 11.5% — led by macro strategies — compared to the S&P 500, which was down 20%. Hedge fund managers outperformed the (S&P 500) by 850 basis points because they had much lower beta compared to equity markets."

Returns of the HFRI Fund Weighted Composite index for the first and second quarters of 2020 were starkly different, with a 9.1% return in the quarter ended June 30 compared to the 20% return of the S&P 500 index during the period, reflecting the sharp market rise over the three-month period.

For the year ended June 30, the HFRI Fund Weighted Composite index was down 0.6%, compared with a 7.4% gain for the S&P 500.

The wide range of investment opportunities in the year ended June 30, especially in the first six months of 2020, led to "huge dispersion in returns as managers demonstrated what they could do by exploiting market dislocations," said Christopher W. Walvoord, Chicago-based partner and global head of liquid alternatives research and portfolio management at Aon Investments USA Inc.

"The hedge fund managers that did well were those that successfully hedged risk during this period. A lot mattered on how you implemented your strategy during the uneven recovery … after the big pullback in the first quarter that resulted in a lot of dispersion," Mr. Walvoord said.

Mr. Walvoord declined to name the hedge managers he was alluding to, but noted that hedge fund strategies that performed particularly well in the first half of this year included discretionary macro, long/short hedged credit and equity market neutral.

Returns dispersion for hedge funds in the HFRI Fund Weighted Composite index for the year ended June 30 ranged from an average 26.2% for the index's top decile to -28.8% for the bottom decile, according to data prepared for P&I by HFR.

Broad dispersion of returns across hedge fund strategies in the year ended June 30 was led by the 18.4% return of the HFRI 500 EH Technology index while the HFRI 500 Event-Driven index was the worst performer over the period, down 3.4%, HFR data showed.

Saba Capital Management LP, New York, was among the hedge fund managers industry sources said helped to widen hedge fund returns dispersion.

The firm's multistrategy flagship fund combines credit relative value, tail risk and closed-end fund arbitrage strategies and is designed to deliver alpha and do well in uncertain conditions, said Boaz Weinstein, Saba's founder and CIO.

"The market was slow until February because relative value and arbitrage seemed insignificant in comparison with rising equity markets. We were trying to catch volatility and there wasn't much of it," Mr. Weinstein said.

The Saba team realized in February that there was significant mispricing in credit default swaps with prices for high-yield CDS for troubled companies at about the same level as CDS on investment-grade companies, Mr. Weinstein said.

Saba's wager was that spreads of high-yield and investment-grade CDS likely would go back to their historical means in the next market correction, the price of junk bonds would fall and the CDS for them would rise sharply while investment-grade CDS prices would remain stable or rise.

As the pandemic began to roil global markets in late February, Saba's bet worked extremely well and the firm had "enormous gains" in the first quarter, Mr. Weinstein said, declining to provide returns.

"The first quarter was awesome, but the second quarter was more about maintaining and managing the fund, which generally is long volatility," he said.

Mr. Weinstein declined to provide the one-year return of Saba's flagship hedge fund in the year ended June 30 but a source with knowledge of the fund's performance, who asked for anonymity, said the return was 89.3%.

Without providing specifics, Mr. Weinstein said existing and new clients are interested in and have invested in Saba's master fund, adding "their antennas are up regarding market uncertainty and in recognizing the known unknowns."

Saba Capital managed $2.9 billion as of June 30, up 67.6% in the year, and ranked 75th in P&I's hedge fund survey universe.

The high level of returns dispersion widened the span of AUM gains and losses among individual hedge fund managers in P&I's universe in the year ended June 30.

Long/short equity manager D1 Capital Partners LP, New York, which was new to P&I's ranking last year after launching in 2017, had the largest AUM gain among survey respondents — 86.8% — to $12.7 billion in the year ended June 30.

AQR Capital Management LLC, Greenwich, Conn., had the largest decline with worldwide assets in hedge funds declining by nearly half — 47.2% — to $32.1 billion in the year ended June 30. The decline dropped AQR to the 11th spot in P&I's ranking from fourth the prior year.

Kevin Infante, an AQR spokesman, declined to comment on the firm's fall in hedge fund AUM.

The composition of the ranking of the five largest hedge fund managers in P&I's universe changed with AQR's AUM decline as well as the 9.5% AUM drop to $38.8 billion for New York-based Two Sigma Investments LP/ Two Sigma Advisers LP. Two Sigma moved down to the seventh position from fifth.

The top three spots continued to be held by:

Bridgewater Associates LP, Westport, Conn., remained No. 1 with worldwide assets of $98.9 billion, down 25.1% from the prior year.

Renaissance Technologies LLC, New York, retained second place with assets up 2.9% to $70 billion.

Man Group PLC, London, held on to the third position with AUM growth of 0.5% to $62.3 billion.

New York-based Millennium Management LLC replaced AQR in fourth place, up from sixth, with growth of 13.2% to $43.9 billion. Elliott Management Corp., New York, moved up to the fifth position from the seventh spot, thanks to growth of 11.2% to $42 billion.

Among continuing trends supported by P&I's annual survey data is the asset concentration among the largest hedge fund managers.

About 64%, or $835 billion, of total worldwide assets in P&I's universe were controlled by the 25 largest hedge fund managers, down slightly from 66% in last year's survey. The 10 largest hedge fund managers ran 38% of total universe assets compared with 41% the prior year.