Editor’s Letter – Issue 146

January 2020

Hamlin Lovell
Originally published in the January 2020 issue

Hedge fund industry assets have reached a new record of US$3.3bn, according to HFR. Despite small net outflows, the best performance since 2009 has boosted the total to a new high. The HFRI Fund Weighted Composite Index delivered 10.4% in USD in 2019, which was only surpassed in 2009 when it made 19.98%.

All of the major strategy categories were positive for the year. Standout numbers included equity hedge funds specializing in the healthcare and technology sectors, which were up 23.8% and 16.15%, respectively. These are the growth sectors that have been powering ahead the US stock market. And although the value style of investing has lagged growth, the HFRI Equity Hedge Fundamental Value Index made 16.07% in 2019.

The number of new launches tracked by HFR has dropped to just 391, the lowest number since 1999.

Hamlin Lovell, Contributing Editor

In event driven strategies, activists have been leading the way, up 18.35% for the year with some managers such as Bill Ackman’s Pershing Square Holdings, which is listed on the LSE, up over 50%. Credit arbitrage and special situations managers also made double digit returns. Even distressed debt managers eked out a gain of 2.52%, notwithstanding the generally negative performance of CCC and D rated corporate paper in the US.

Macro trading strategies also made money, partly because CTAs enjoyed a resurgence of performance. The index of active macro traders did best, up 8.14%, while systematic diversified funds made an average of 6.91%. Currency traders did worst only creeping ahead by 0.91%.

The relative value family was also profitable, led by yield alternatives up 12.05% and convertible arbitrage up by 10.39%, while strategies trading around volatility, sovereign and corporate debt averaged high single digit returns.

The HFRI Fund Weighted Composite Index return of 10.38% outperformed the HFRI Asset-Weighted Composite Index return of 7.57% by nearly 3%, indicating that smaller and medium sized funds have been outperforming larger funds, as usual.

The number of new launches is not a perfect proxy for smaller and medium sized funds, since some managers stay at modest levels of assets for multi-year periods. However, it is remarkable that the number of new launches tracked by HFR dropped to just 391, the lowest number since 1999. It is possibly no coincidence that new hedge fund launches reached their nadir at the zenith of the last equity bull market. Just two years later, in 2002, over 1,000 funds per year were launching and in 2004 more than 2,000 did so, after the bear market in equities.

The number of launches should not be viewed in isolation. The number of liquidations in 2019, at 540, was also very low – the lowest since 2004. In net terms, the number of funds is down by about 3% from a peak of 8,474 in 2015 to 8,207 in 2019 but the tally has hovered around above 8,000 since 2013. It seems likely that the average quality of launches is rising and this matches our own experience seen in reports such as our Tomorrow’s Titans report.