The Strategist

Hedge funds: rise and falls of 2016

12/27/2016 - 13:23

2016 was a difficult year for hedge funds. They were actively criticized, called exaggerated, and their results were disappointing. Famous managers, including Ray Dalio (founder of Bridgewater Associates) and John Paulson (Head of Paulson & Co), showed double-digit losses. At the same time, Jason Mudrick’s bond fund (founder of Mudrick Capital Managemen) earned good money on commodities rally. Strategies focused on macroeconomic trends and market shares have performed the worst.

Those hedge funds that relied on macro-economic trends showed one of the worst results in 2016. However, volatility caused by Trump’s victory allowed to win back some terrible losses of the first 10 months. Brevan Howard Asset Management and Rubicon Fund Management changed their strategies in November, and reached profitability for the year as a whole. The November rally gave an impetus to Brevan Howard Asset Management, so that its growth may eventually reach 2.8% for the year. Rubicon Global Fund earned 21% in November, which will result in approximately 2.2% for 2016 as a whole.

Some macro funds, such as Dymon Asia Capital worth $ 721 million, took their lead from low interest rates in the Asian region. In particular, the yen weakening of against the dollar lifted them. The fund gained 22% in the previous month and grew 45% for the year.

Despite these particular cases, the main trend was negative. Pure Alpha II fund, managed by Bridgewater Associates Dalio, dipped in late September by 10.3%, and was not able climb in the black for the year. According to sources familiar with the situation, the total drawdown was 0.2% at the end of November.

Losses of macro economy-oriented Moore Capital Management may constitute 1.23%. However, its founder Louis Bacon said in a letter to investors that he is "extremely optimistic".  According to him, trading opportunities changed: winning Trump, prospects of rising interest rates and a stronger dollar, as well as thriving corporate sector and growing market liquidity.

Funds that hold both long and short-term strategies in the stock market showed mixed results.

Hedge Fund Research Inc., which adheres to a balanced strategy, gained 2% over 11 months. On the other hand, European fund Lansdowne Developed Markets Fund, worth $ 9.2 billion, sank 18%. Crispin Odey Fund dropped to 48% in total, despite a 20%-jump in two days after the Brexit referendum, but then sank heavily due to weakening of the pound sterling. "A number of funds have suffered during the sale earlier this year, and then could not take advantage from the after Brexit rally due to restrictions on risks", - commented Nicolas Roth, co-chairman of Geneva investment company Reyl & Cie. 

Bond funds, betting on the commodities growth, have won, even despite the fact that the bond market is out of favor now. On average, they earned 12% on the oil prices. Mudrick Capital Management is beating its own record, having earned 35.5% by the end of November. Marathon Asset Management's Special Opportunity Fund with $ 13 billion-worth assets enlarged by 18.5%, and Canyon Capital Advisors capital fund with $ 21 billion gained 8.3% according to sources.

In the next year, hedge funds will be looking for an opportunity to earn double-digit percentage, according to their promises sent to clients. Trump’s politics will probably lead to an increase in profits in various branches of industry, and trigger a wave of mergers and acquisitions that will allow many hedge funds to return to duty. David Saunders, executive director of hedge fund K2 Advisors says that those shares are bound to "shoot" next year. Trump’s program, aimed at deregulation, will allow companies to activate redemption of shares, increase capital expenditures, and expand M&A market, believes Saunders. Changes in the Obamacare law and infrastructure spending will have an impact on the health sector, technology, metallurgical and mining industries, the expert believes.