Hedge Funds Finally Do Their Job Amid Chaos of Stock Tumble
A commuter carries a soft briefcase while walking through the central business district in Sydney, Australia. (Photographer: Brendon Thorne/Bloomberg)

Hedge Funds Finally Do Their Job Amid Chaos of Stock Tumble

(Bloomberg) -- At long last, beleaguered hedge fund managers may be having their moment.

After a decade of mostly mediocre returns -- at least compared with the red-hot stock market -- hedge funds this month appear to have survived the worst drubbing for equities since the financial crisis. Some even made money.

Macro manager Alan Howard is among the winners so far, along with stock pickers Crispin Odey and Russell Clark. Estimates from big banks during the week showed fundamental stock hedge funds were either eking out gains or losing a matter of basis points this year, contrasting with the more than 11% drop in the S&P 500 Index this week.

“Finally, after many years, you might look at this month and say that hedge funds are doing what they are supposed to do,” said Craig Bergstrom, chief investment officer at the $7.8 billion Corbin Capital Partners, which invests in hedge funds.

This week saw the MSCI World Index fall the most since the 2008 financial crisis, as the World Health Organization raised its global risk level for the coronavirus and as a growing number of corporations warned of hits to sales and profits. Yields on U.S. 10-year treasuries are at all-time lows, and oil is below $50 a barrel.

Paul Tudor Jones, who runs the $8 billion Tudor Investment Corp., was one of the first investors to sound alarms about the virus last month.

“We’ve got a curve ball with this coronavirus, I think it’s a big deal,” he told CNBC in an interview on Jan. 21 from the World Economic Forum in Davos, Switzerland. “From a trading standpoint, there’s zero way I’d want to be long until -- we really need about two weeks to see what type of spread we get.”

Posting Gains

Brevan Howard Asset Management’s macro fund climbed about 3% this month through Feb. 26, according to a person familiar with the matter, and investors in other macro funds say they expect Howard’s peers will produce positive returns, too. That’s because these funds generally started the year being long bonds and short oil, bets that have made even more money as expectations have grown that the virus will weigh on the global economy and that the U.S. will cut interest rates.

Some managers also were long gold, which initially climbed about 10% this year before paring gains this week. And some cut their exposure to stocks in the last several weeks, investors said.

“Hedge funds with the most directional exposure, of course, will feel the pain this month but the more dynamic diversified, insurance-type strategies have held up really well,” said Adam Taback, chief investment officer for private wealth management at Wells Fargo & Co. Long-short credit managers are doing better than expected, he said, as spreads have started to widen out.

The large multi-manager firms eked out positive returns as well, with both Izzy Englander’s Millennium Management and Steve Cohen’s Point72 Asset Management gaining less than 1% this month, according to people familiar with their performance.

Stock-picking firm Marshall Wace gained a little more than 1% in its Global Opportunity Fund, another person said. Stock bears did even better. Clark’s Horseman Global Fund surged 6% in the seven days to Feb. 26, while Odey’s flagship European fund gained about 5%.

Stock funds that tend to concentrate their portfolios around fewer names suffered in the market downturn. David Einhorn’s Greenlight Capital dropped 3.4% in the month, and Bill Ackman’s publicly traded Pershing Square Holdings Ltd. fell 3.5% through Feb. 25.

Bets at stock funds include shorting luxury tourism and buying health-care companies.

Seiga Asset Management, a Hong Kong-based hedge fund backed by Blackstone Group Inc., told investors in a letter on Feb. 13 that one of its picks is B-Soft Co., a Chinese company that supplies electronic medical charts to hospitals. The fund anticipates China will accelerate spending on the health-care system in the wake of the crisis.

One multibillion-dollar hedge fund manager, who asked not to be identified, said he expects recovery in China to be gradual rather than V-shaped, because workers in some parts of the country are struggling to return to plants that reopened. In the short term, he’s shorting casinos, hotels and cruise operators. He’s betting on some Asia-based health-care companies, as well as online gaming, which he anticipates will do well with large swaths of people under quarantine.

Pedro Escudero anticipates more deals may emerge. He runs DPM Capital, a $160 million long-short equity hedge fund that was up 124% last year, Bloomberg reported in January. He expects markets will move lower once the U.S. confirms a wider spread of the virus. At that point, it may be time to buy, he said by phone.

“This will be a first- or second-quarter event, and will slow things down -- but I think the Fed is going to have to move, and that this is an incredible time to start picking good valuations,” he said by phone. “March will be probably be the best time to buy stocks since December 2018.”

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