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Tuesday, December 27, 2022
Today's newsletter is by Alexandra Semenova, markets reporter at Yahoo Finance. Follow Alexandra on Twitter @alexandraandnyc. Read this and more market news on the go with the Yahoo Finance App.
Hedge funds have garnered a bad rap in recent years, and rightfully so — performance has been lackluster and the exorbitant fees collected by firms have been hard to justify.
Last year, hedge funds delivered broad-based annual returns of 10.3%, per the benchmark HFRI Fund Weighted Composite Index from Hedge Fund Research. The S&P 500 returned nearly 27% over the same period.
But 2022 may be a year of redemption for the industry, all thanks to smart bets placed by a few big outperformers amid changing market conditions.
Citadel, among this year's standouts, is on pace for its most profitable run ever. Its flagship Wellington fund reportedly gained 32% year-to-date through November, while the S&P 500 was down more than 14% over the same period. The firm is expected to return about $7 billion in profits to its investors this year.
At Citadel, performance was so good, in fact, CEO Ken Griffin paid out of pocket last month for roughly 10,000 employees and their families to take three-day trips to Disney World to celebrate.
The D. E. Shaw Group and Millennium Management are also poised for double-digit annual returns, gaining 23% and 10%, respectively, as of the end of November. And then there’s the Haidar Jupiter hedge fund, a global macro fund, which surged roughly 267% through October, according to Bloomberg.
More broadly, HFR's weighted composite index, a global, equal-weighted index of the largest hedge funds that report to the firm's database, has hedge funds down just -2.62% year-to-date as of November against a 14.39% drop for the S&P 500 over that same period.
After the 2008-2009 Global Financial Crisis, easy money policies by global central banks kept money cheap, limiting dispersion in the equity market. Elevated dispersion – or a wide range of outcomes for an investment – is a key driver of hedge fund performance.
Joseph Burns, head of hedge fund research for iCapital, points out how this year changed that dynamic. An end to fiscal stimulus and tightening financial conditions has lifted the potential for performance dispersion and changed the tide for the industry.
"Rate increases make it likely that equity performance dispersion will increase, Burns said, "which should allow greater room for these active strategies to find opportunities and inefficiencies in the market."
Bill Ackman’s Pershing Square is on pace for a big comeback from a bleak start to the year. That is, if its momentum holds up. After an 8% gain in November, Pershing Square Holdings is down just 4.8% year-to-date, a noteworthy improvement from the 25% drop across the first half of the year.
A key part of the turnaround story was Ackman’s winning bets on rising interest rates through a series of hedges that earned Pershing about $2 billion this year and helped offset much of the losses from its equity portfolio. Those hedges have generated $5.2 billion since the onset of COVID in 2020, Pershing Square told investors in a call last month.
Hedge fund manager Bill Harnisch, chief investment officer at Peconic Partners, told Bloomberg he credited the firm’s 29% return this year to a winning call on inflation 15 months ago.
Also making the case for hedge funds were their big returns this year for retirees at a time when a rout across traditional stock and bond allocations battered pension portfolios.
The Teacher Retirement System of Texas, one of the biggest pension plans in the U.S. and a prominent hedge fund allocator, is a good example. The system lost 2.3% for the fiscal year ended June 30, besting the median 5.1% loss seen by its peers, the Wall Street Journal reported, thanks to a 9.4% return from hedge funds Man Group, Systematica Investments, and Citadel.
To be sure, however, some hedge funds are in the throes of a dismal year.
Tiger Global Management, Chase Coleman’s tech-focused firm, is said to be down 54% in 2022. Melvin Capital, once a top Wall Street firm, shuttered after losses this year added to the billions erased during the meme stock saga.
And though the success of hedge funds in 2022 is concentrated among a few big-name winners, the year is still likely to mark a much-needed turning point for an industry that’s been harshly criticized over the past decade.
In 2007, Warren Buffett famously bet that an unmanaged, low-cost S&P 500 stock index would outperform a group of hedge funds over the 10-year period from 2008 to 2017 — and he was right. He’d win the bet again if he'd placed it for the past 10 years, too.
After a decade-long bull market, it became easy to argue that stocks “always go up,” so there’s no need to shell out the infamous “2 and 20” charged by the hedge fund industry.
But the next 10 years might be different.
Much of Wall Street sees stocks going nowhere next year. And BlackRock, the world’s largest asset manager, has warned about a forthcoming "malaise" for global markets and the economy.
That’s where hedge funds may continue to come in.
This year’s quick and sustained downturn across asset classes seems to have brought the “hedge” in “hedge fund” back in a big way.
And with Wall Street not preparing for a new bull market anytime soon, these allocations may have re-asserted their case for a place in portfolios with a standout 2022.
What to Watch Today
Economy
8:30 a.m. ET: Wholesale Inventories, month-over-month, November Preliminary (0.5% during previous month)
8:30 a.m. ET: Advance Goods Trade Balance, November (-$96.8 billion expected, -$99.0 billion during prior month)
8:30 a.m. ET: Retail Inventories, month-over-month, November (-0.1 expected, -0.2% during prior month)
9:00 a.m. ET: FHFA Housing Pricing Index, month-over-month, October (-0.6% expected, 0.1% during prior month);
9:00 a.m. ET: S&P CoreLogic Case-Shiller 20-City Composite, month-over-month, October (-1.40% expected, -1.24% during prior month)
9:00 a.m. ET: S&P CoreLogic Case-Shiller 20-City Composite, year-over-year, October (8.20% expected, 10.43% during prior month)
9:00 a.m. ET: S&P CoreLogic Case-Shiller U.S. National Home Price Index, year-over-year, October (10.65% during prior month)
9:00 a.m. ET: Dallas Fed Manufacturing Activity, December (-14.4 during prior month)
Earnings
No notable reports scheduled for release.
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