A handful of giant firms are gaining dominance over the hottest corners of the hedge fund industry. This year showed why.
While nearly all hedge fund indexes are negative, a closer look at the data shows that multi-strategy and macro funds with the biggest concentration of investors’ cash posted gains, shielding clients from a ferocious selloff in global markets as central banks began raising rates and rolling back years of quantitative easing.
Giants from Citadel to Millennium Management produced double-digit gains as their army of traders once again earned steady returns. Those betting on macro economic trends, such as $5 billion Haidar Capital and $15.5 billion Rokos Capital Management, are poised for record annual gains.
“2022 is a tale of bifurcation on all aspects,” said Nicolas Roth, head of alternative assets at Geneva-based private bank Reyl & Cie. “From performance, asset raising to hiring, big hedge funds roared back, while small guys are struggling.”
Both critics and fans have plenty of material this year for arguments in support of or against the $4 trillion industry.
For detractors, another lousy year for stock pickers was best captured by Tiger Global Management hedge fund’s 54% slump after its bets on stocks and private assets imploded. The $75 billion of net outflows from the industry is another indication that many investors now view hedge fund fees as no longer worth paying.
Yet supporters could point to rising demand for the most coveted funds. To gain access, many are now accepting fees that can rise to many times traditional hedge fund charges and are willing to lock away their investments for longer. Others are being turned away as the funds close their doors to new money.
For the year ahead, the stage is now set for a robust test of the industry.
Rising interest rates and a deteriorating global economy have upended the trading environment. While the new volatile scene has created fertile hunting grounds for credit and equities traders, managers will have to keep their wits about them to avoid blow ups.
“Next year is almost the perfect setting for a hedge fund strategy,” said Mario Unali, a senior money manager at Kairos Partners that invests in hedge funds. “You get higher rates, you get more volatility, you get fundamentals that are back in business and it’s not going to be all about passive investments.”
The top three money pools investors want to allocate to in 2023 are macro, credit and equity, according to a survey released this month by industry tracker Preqin.
Here’s an analysis of the industry through a series of charts and data:
The Good
Nine in every 10 dollars invested in macro hedge funds gained 23.7% on average through September this year, while 95% of the capital allocated to multi-strategy investment firms eked out gains, according to a Bloomberg analysis. By comparison, a 60/40 portfolio of stocks and bonds slumped almost 21% and the S&P index declined by about 25%. Hedge funds on average lost 9% during the period.
Citadel’s flagship Wellington fund surged 31% through November this year, DE Shaw Composite gained 23%, while Millennium advanced 10%. Among macro hedge funds, the Haidar Jupiter fund soared 194%, Rokos made 45% and Brevan Howard’s main hedge fund gained 18%.