Big Hedge Funds Are Top Performers, for a Change (From The Wall Street Journal)
~ Friday, January 20, 2023 Blog Post ~
By Gregory Zuckerman, January 19, 2023
For the first time since 2018, larger hedge funds, including those focused on quant, macro and arbitrage strategies, outperformed their smaller rivals
Funds including those using quant, macro and arbitrage strategies beat more-focused offerings
Lately, bigger is better for hedge funds.
For the first time since 2018, larger hedge funds outperformed smaller hedge funds. The evidence: HFRI Fund Weighted Composite Index, which gives equal weight to funds of all sizes, fell -4.25% in 2022, while the HFRI Asset Weighted Composite Index, which gives more weighting to the larger funds, rose: 0.97%.
The performance by the bigger funds is a shift. In 2021, for example, the composite index rose 10.16% compared with a 7.39% gain for the asset-weighted index. In 2020, the composite index gained 11.83% versus a gain of just 2.19% for the asset-weighted index.
Small funds can focus on their best investing ideas, rather than stretch to invest a larger sum of money, and they can be nimble in their trading, entering and exiting positions more easily. Lately, though, larger funds have been better able to hire top talent. These funds are also employing sophisticated risk-management systems.
Perhaps most important, bigger funds are more likely than smaller funds to focus on quantitative, arbitrage and other strategies that don’t rely on rising markets to generate profits, investors say. That was an advantage in 2022, a year in which both stocks and bonds tumbled. Instead of betting on the market’s direction, some of the larger funds seek to take advantage of fleeting pricing discrepancies in stock and bond prices, trades that can work in any kind of market.
Large funds also can employ higher levels of leverage, or borrowing, investors say.
“The reality is they’re using a lot of leverage, though they will argue — sometimes convincingly — that they have a good handle on managing their risk,” said Matthew Litwin, chief executive of Greycourt & Co., a Pittsburgh-based investment firm whose clients invest in hedge funds and other strategies.
Bigger funds that saw strong gains last year while pursuing quant trading among their investment strategies included D.E. Shaw’s multistrategy Composite fund. The $60 billion firm’s largest fund rose 24.7%, while D.E. Shaw’s Oculus fund gained 20%. Citadel, the hedge fund operation that manages $54.5 billion, saw its flagship multistrategy fund, Wellington, return 38.1%, while the firm’s Citadel Equities fund rose 21.4%.
Quant pioneer Renaissance Technologies LLC’s well-known Medallion hedge fund rose about 19% in 2022, even after sky-high investor fees amounting to 5% of assets and 36% of the fund’s gains, according to people familiar with the matter. The results of the fund, which was launched by mathematician Jim Simons and is available only to employees and select others, fell short of Medallion’s average annual gains, after fees, of over 35% since 1988.
More surprising: Medallion, which hardly ever has losing months, recorded two losing months in 2022, the people said. Meanwhile, two of Renaissance’s funds available to outsiders, the Renaissance Institutional Equities Fund, known as RIEF, and the Renaissance Institutional Diversified Alpha, rose about 5% last year.
A Renaissance spokesman declined to comment.
“Medallion had only three down months between 2000 and 2010, so for the fund to have two in a year is pretty surprising,” said Richard Dewey, a hedge fund and technology executive who has studied the fund’s history. “It was still a pretty great year compared to most funds, though, and time will tell if 2022 was an aberration or it’s a sign others are finally catching up.”
So-called macro funds, or those that bet on global macroeconomic trends, had gains with bets on falling bond prices, falling stock prices and other bigger market moves. Macro funds rose 9% last year, according to HFR, a hedge-fund data tracker.
Write to Gregory Zuckerman at Gregory.Zuckerman@wsj.com
Appeared in the January 20, 2023, print edition as ‘Big Hedge Funds Top Smaller Rivals In Shift’.
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