Eleven Hedge Fund Traders Scored Big During Worst of the Crisis
(Bloomberg Markets) -- A small group of hedge funds managed to overcome the fast and furious market rout in March as the coronavirus pandemic sent countries around the world into a lockdown. For them, the sell-off brought riches that some haven’t seen since … well, since the last financial crisis. Notably, these profits were derived from a wide variety of investment approaches, from macro and credit to long/short equity and oil.
The crisis beaters were the exceptions.
Most hedge funds, including those run by industry titans such as Ray Dalio and Michael Hintze, failed in their mission to protect investors from the market turmoil. Three in every four hedge funds lost money, with some down as much as 40% in March, according to data compiled by Bloomberg.
The outcome threatens to further disrupt the hedge fund industry, which in March saw assets plunge below $3 trillion for the first time since 2014. Although it was too early in May to gauge the eventual damage, initial fund-flow figures painted a grim picture. Clients withdrew a net $33 billion in the first quarter, the most in more than a decade, according to Hedge Fund Research Inc.
Here are some of the March winners:
UNIVERSA Tail risk
- ASSETS UNDER MANAGEMENT: About $4.4 billion in regulatory assets (includes borrowed money) as of Dec. 31
- Mark Spitznagel, who founded the firm in 2007, is known for profiting during the dot-com bust and the 2008 market meltdown.
- MARCH RETURN: 3,612%
Universa Investments tells clients to think of its tail-risk hedge fund as a kind of insurance against financial catastrophe. Sure enough, the fund soared more than 4,000% through the first quarter, gaining 3,612% in March alone, according to an investor letter seen by Bloomberg News. It was able to lock in the gains by cashing in many of its holdings while at the same time having protection in place against any further plunge in stock prices.
Nassim Taleb, author of The Black Swan: The Impact of the Highly Improbable, is a scientific adviser to the firm. The pandemic wasn’t a black swan—it was a predictable event, he told Bloomberg TV in late March. Even so, he said, insurance should always be in place since the timing of such events can’t be predicted.
In an April 7 letter to investors, Spitznagel, the firm’s president and chief investment officer, said central bank stimulus programs designed to counter the pandemic’s economic consequences could be “destructive” and warned of trouble ahead. “The world remains very much trapped in the mother of all global financial bubbles,” he wrote. —Melissa Karsh and Erik Schatzker
SABA CAPITAL Credit, relative value
- AUM: About $2.7 billion
- Boaz Weinstein, who started Saba in 2009, has made money exploiting the price differences of related credit securities and typically does best when volatility is high.
- MARCH RETURN: About 36%
Weinstein, a lifelong chess master, had been positioned to capitalize on turbulence in debt markets. The former head of credit at Deutsche Bank AG has had a mixed record in his flagship fund since starting Saba. But he tends to thrive in market chaos, and this year's turmoil has proven no exception.
Saba Capital Management surged 71% in the first three months of the year in its main hedge fund, benefiting from some of the most violent market swings in almost a decade, according to a person with knowledge of the matter. Wagers on credit-default swaps and derivatives trades on companies in the retail and energy sectors helped spur the gains at the 11-year-old firm.
The bets go back to the end of last year. That’s when Saba began snapping up credit-default swaps on companies including Royal Caribbean Cruises Ltd. and United Airlines Holdings Inc. This year he was able to then sell the swaps at much higher prices as the pandemic began to weigh on the global economy. —M.K.
HAIDAR CAPITAL Macro
- AUM: About $900 million
- Said Haidar, who founded his eponymous firm in 1997, bets on macroeconomic shifts in economies around the world.
- MARCH RETURN, HAIDAR JUPITER FUND: 25%
Haidar runs one of this year’s top-performing macro hedge funds. His $900 million Jupiter Fund surged 25% in March—its largest monthly gain on record—taking its returns for the quarter to 53.5%, according to an investor letter seen by Bloomberg News. He’s reaped the gains by betting on haven assets such as gold, Swiss francs, the yen, and bonds.
Haidar Capital Management sifts through trends in global economies and geopolitics to bet on everything from currencies to interest rates to stock indexes. This time around, he’s told investors, the market pain is only just beginning. As a result, he warned them not to buy the dip in stocks in March, as he expects the pandemic’s effects to drag on.
For one thing, Haidar is conservative in his expectations about the development of a vaccine. What’s more, he’s said the full extent of the problem is being masked as Covid-19 cases go undetected in developing nations, with South Africa, India, and Turkey particularly exposed. —M.K., with Ben Bartenstein
PERSHING SQUARE Activist
- AUM: $8.1 billion as of April 30
- Bill Ackman, the firm’s founder and chief executive officer, is known for amassing stakes in companies and pushing them to make changes.
- MARCH RETURN: 11.1%
As markets sold off in March, Ackman was busy putting hedges in place to offset the effects of the coronavirus on his portfolio. That paid off massively as he made roughly a 100-times return, generating $2.6 billion in proceeds by the time he exited them on March 23.
It’s a profit that might not have materialized at all: Ackman considered liquidating the whole portfolio before putting on the hedges—made mostly through purchases of credit protection on investment-grade and high-yield credit indexes—but then decided not to. Then in mid-March he made a “recovery bet” on the economy, investing $2.5 billion in equities after gaining confidence “that the president and his team were heading in the right direction,” he said in a Bloomberg TV interview.
The moves helped Pershing Square Capital Management—known for making concentrated, often controversial bets on companies including Herbalife, Valeant Pharmaceuticals, and Chipotle—erase losses from earlier this year. Since then, Ackman has invested the capital back into some of his portfolio companies, including Lowe’s Cos. and Warren Buffett’s Berkshire Hathaway Inc. The fund was up 17% for the year through April.
“It would not be a surprise to see a rapid recovery in the stock market when investors have greater confidence that the risks of the virus are largely behind us,” Ackman wrote in an April 6 letter to shareholders. —M.K. and Scott Deveau
ANDURAND Oil trading
London and Malta
- AUM: More than $1 billion in 2019
- Pierre Andurand, who runs one of the few oil-focused hedge funds still around, has traditionally been one of the most bullish traders.
- MARCH RETURN, ANDURAND COMMODITIES DISCRETIONARY FUND: 154.7%
Andurand Capital Management abandoned its bullish views to reap rich dividends in March as crude prices slumped to levels last seen decades ago. Its Andurand Commodities Master Fund was up 63.5% in March, ending the first quarter with gains of 53% and expunging all the losses from the previous two years. The main driver of the returns was the fund’s long put options on both Brent and West Texas Intermediate crude, according to a person with knowledge of the matter. Energy prices plunged as the spread of Covid-19 led to the shutdown of economies around the world, destroying demand for oil as global inventories ballooned.
Andurand says he started to get worried in late January. He spent weeks studying the virus and building models before concluding that the number of cases and the fatality rate would be significantly higher than what leading epidemiologists and health organizations were saying at the time. “This was deeply concerning,” he says. “It was clear from the evidence that the virus would be extremely harmful to oil demand.”
In early February he established a short position in oil by buying put options and shorting futures. He maintained the exposure throughout March. The bet led to returns of 154.7% in his Commodities Discretionary Fund and more than 60% in his Andurand Commodities Fund, marking his best-ever month. — Nishant Kumar
- AUM: More than $5 billion
- Loïc Fery, a credit trader, co-founded Chenavari in the depths of the last financial crisis with Frédéric Couderc.
- MARCH RETURN, DYNAMIC CREDIT CYCLE FUND: 73.5%
Fery seems to have learned firsthand about Covid-19. In early April he thanked his Twitter followers for their “kind messages,” saying “the 10 difficult days (lung pain, short of breath) are hopefully behind” and “this virus is certainly not just a flu!” (He declined to comment further about his illness.)
By then, Chenavari Investment Managers’ $400 million Dynamic Credit Cycle Fund was already a big winner, gaining an estimated 73.5% in March as credit spreads widened, according to a document seen by Bloomberg News. Amid measures to control the pandemic, a gauge of European high-yield credit risk rose in March to its highest level since 2012.
“In this environment, the many weaknesses of the overlevered credit market will be exacerbated,” says Fery. A former global head of credit markets at Crédit Agricole SA’s Calyon unit and president of Brittany, France-based soccer team FC Lorient, Fery founded Chenavari along with Couderc in the depths of the financial crisis. Couderc, who manages the Dynamic Credit Cycle Fund, spent most of his career at Bear Stearns and Natixis SA. — Katie Linsell
ODEY Long/short equity led by macro calls
- AUM: $808 million in main strategy as of March 31
- Crispin Odey is known for making big, directional wagers against the popular view. His recent bearish bets have led to losses in four of the last five years.
- MARCH RETURN, ODEY EUROPEAN INC. FUND: 21%
- In March, Odey pulled off the second-best monthly gain in his hedge fund since Odey Capital Management started trading almost three decades ago. His flagship Odey European fund gained 21% as his short equity bets on companies including Lancashire Holdings Ltd. and Auto Trader Group Plc, as well as wagers against U.S. shale oil operators, paid off. The fund also made money betting long on the refiners and tanker owners who benefited as investors looked to park surplus oil.
Odey’s gains came despite a number of his bets going against him. His wager on a pickup in inflation backfired. A rally in bonds and bad bets in Argentina, including on Banco Macro SA, also hurt. “It was easier to see what didn’t work rather than what did work,” he says, adding that money in the short term will be made through bets on rising inflation. “Insourcing will be in vogue, pointing to everything to be more expensive,” Odey says. —N.K.
BREVAN HOWARD Macro
- AUM: $9.4 billion as of March 31
- Co-founded by billionaire Alan Howard, it’s one of the best-known macro trading firms in the world.
- MARCH RETURN, BREVAN HOWARD MASTER FUND: 18.3%
For much of the past decade, Brevan Howard has been in the spotlight for mediocre returns and fleeing investors. Gains in March put the macro trading powerhouse back on track, with its Master Fund surging 18.3%, the most since it began trading in 2003. Returns in the first quarter rose to almost 23%, a sharp turnaround for a firm that had assets of $40 billion in 2013.
The Master Fund’s $3.8 billion in assets is divided among more than a dozen traders, some of whom also run their own hedge funds. Long bets on U.S. rates, put options on crude oil, and directional bets on interest rates boosted returns as energy prices tumbled, Brevan Howard told clients in a letter seen by Bloomberg News.
Returns of more than 35% were generated by a pool of money run by traders, including Howard. When Howard stepped down as CEO last year to focus on trading, Aron Landy, the firm’s chief risk officer, took over. —N.K.
HORSEMAN Long/short equity
- AUM: $327 million as of March 31
- Born and raised in the Australian capital of Canberra, Russell Clark runs the firm. He’s known for his persistent bearish bets since 2012.
- MARCH RETURN, HORSEMAN GLOBAL FUND: 15.2%
Clark, whose excruciating losses were the talk of the town not long ago, came bouncing back. Horseman Capital Management’s Global Fund gained 15.2% in March, boosting returns for the first quarter to almost 27%. While the gains are still not enough to repair damages he suffered amid a stock market rally last year, they seem to validate some of the warning signals he’d been flagging for years.
As securities prices swung wildly in March, many of Clark’s short bets paid off because they were tied to autocallables, complex equity-linked securities that aim to generate regular income for buyers betting on calm to prevail. For Clark, whose fund’s assets shrank to $261 million at the end of March, down from $1.7 billion at the end of 2015, the returns during the pandemic have brought much-needed relief.
Clark has positioned his portfolio to benefit from a potential pickup in inflation as the pandemic disrupts supply chains. “Intellectually we have been in the deflation camp for 10 years,” he wrote to investors on April 15. “We are now much more in the inflation camp. I will let others decide if that still qualifies me for the most bearish fund manager.” —N.K.
APS Long/short equity
- AUM: $2.14 billion
- In February founder and Chief Investment Officer Wong Kok Hoi repositioned his firm to give it more of a China focus.
- MARCH RETURN, ASIA PACIFIC LONG SHORT FUND: 10%
Wong was a bear before it was cool, and last year that cost him money. In June 2019 the Japan-educated founder of APS Asset Management warned that markets were overvalued and that the U.S.-China trade war was merely symptomatic of a longer-term conflict between the two superpowers. He shorted key supply chain stocks and casino operators with significantly negative net exposure going into 2020, only to watch them climb.
But Wong stayed the course and was rewarded as markets tanked. While the Covid-19 outbreak has spoiled his plans to partly base himself out of mainland China, it’s rewarded his shorting of gaming operators, an Australian retailer, and a coal stock. When Wong’s $260 million Asia Pacific Long Short Fund climbed in March, it took his first-quarter gains to 16%.
Wong started APS in 1995 after careers at GIC Pte, Singapore’s sovereign wealth fund, and what was then known as Cititrust & Banking Corp., Japan.
With unemployment rising and poor corporate results inevitable, Wong remains pessimistic. “Government measures are disaster relief measures and not stimulus measures, which would lead to job creation or economic output,” he says. “Hence, the expectation of a quick recovery at this point is way too optimistic.” — David Ramli
- AUM: About $5 billion
- Danny Yong, chief investment officer, made his name in macro trading and building a diversified firm investing in public and private markets.
- MARCH RETURN, DYMON ASIA MACRO FUND: 13.9%
The success of Dymon Asia Capital (Singapore) Pte’s $2 billion flagship macro fund in March boosted first-quarter returns to 37%. Since December, Yong had been decrying market complacency and the lack of preparation for major dislocations. The former Goldman Sachs Group Inc. and Citadel trader was convinced that when the market did turn, it would overshoot and catch most investors on the wrong foot.
The fund’s most profitable trades in March were bearish bets against stocks and wagers that Asian currencies outside Japan would weaken against the dollar, Yong says.
Using alternative data ranging from highway congestion to Google search interest, Dymon modeled the coronavirus’s spread and economic impact. He concluded that the Chinese economy would slow more than consensus expectation in February and that the U.S. market was underestimating the economic fallout from the pandemic.
Yong says many countries that put stimulus programs in place did so at the expense of their own currencies. This, he says, “does not solve the issue of a ‘cliff’ in consumer spending when the world is staying home for much of first quarter and most of second quarter.” — Bei Hu
Karsh covers hedge funds in New York. Schatzker is a correspondent for Bloomberg TV in New York. Deveau covers deals in New York. Kumar covers hedge funds in London. Linsell covers corporate finance in London. Hu covers hedge funds in Hong Kong. Ramli covers investing in Singapore.
©2020 Bloomberg L.P.
With assistance from Bloomberg