By Neil Wilson
As we predicted, this past year turned out to be a year of strong performance for hedge funds, propelling many to a remarkable recovery from the dire conditions of 2008. However, after such an incredible roller-coaster ride, now may be a good time to take stock of the true value of hedge funds to investors. One of the greatest advantages of the hedge fund is that it allows much greater flexibility than a traditional long-only structure like a mutual fund to adjust net and gross exposure by offering the option to go short and/or long and the capability to deploy leverage. Nevertheless, the industry still faces plenty of skepticism. Far too many hedge funds failed to cope with the severe investment conditions during 2008, critics complain. Critics say that given the massive fiscal stimulus and quantitative easing following the crisis, the direction of the markets in 2009 was easy to see, making the obvious bet to be leveraged and long and hence giving many funds a free ride back to their high-water marks. If hedge fund managers are so smart, how come so few were able to make money in both years? There are, of course, significant exceptions, such as funds run by John Paulson, which have delivered consistent positive returns since the onset of the financial crisis.
It's true that many funds that did badly in 2008 went on to do well in 2009 and vice versa. But more big European funds than American ones did well in both years. In Europe, three of the top four fund groups by assets—Brevan Howard, BlueCrest Capital Management and Lansdowne Partners—performed impressively in both years. (The other one of the top four by assets, Man Group's AHL managed futures unit, gained 33% in 2008 though, like many CTAs, it struggled in 2009 and lost more than 12%.)
In the case of Brevan Howard's flagship macro fund—now by some distance the biggest fund in Europe with more than $20 billion in assets—the returns were more than 20% in 2008 and more than 18% in 2009, which is phenomenal performance for such a large fund.
BlueCrest's assets are more widely divided across various strategies, but the firm's two biggest funds were also up in both years. The BlueTrend managed futures strategy, managed by Leda Braga, followed up a cracking return of more than 43% in 2008 with a gain of more than 4% in 2009—not a lot but among few CTAs up on the year. And BlueCrest Capital International, the firm's original flagship, managed by Mike Platt, gained more than 6% in 2008 before producing a stunning 45%+ in 2009.
Landsdown's flagship U.K. equity strategy managed by Pete Davies and Stuart Roden—by far the biggest in its field with around $10 billion of assets—also did well during the crisis to protect investors and eke out a narrow gain of 0.55% in 2008 (in its main sterling share class—it was slightly down in dollars and euros). It followed up with a gain of more than 25% in 2009.
Not surprisingly, all three of these firms have seen large inflows of assets in recent months—and featured prominently again with multiple nominations at the annual EuroHedge Awards event, which took place in London in late January. But they were not the only European firms to have impressed investors over the two-year period as a whole. Several additional European firms also did well over the two-year period as a whole by constraining the downside in 2008, including Pharo Management, a $2 billion-plus emerging markets and macro trading firm headed by Guillaume Fonkenell, which also delivered a flat return in 2008 followed by big gains in 2009.
Firms featured at the awards that suffered losses in 2008 but rebounded in 2009 with gains that took them well above their high-water marks included many funds in the Marshall Wace and Gartmore Investment stables. The most spectacular recovery was arguably from Jabre Capital Partners, with a gain of more than 80% on the year in its flagship multistrategy vehicle.
In fact, a long list of European hedge funds massively beat both the markets and the long-only investment world on a two-year view.
Looking ahead, when the fiscal stimulus is removed and its effect dissipates—maybe quite soon—a straightforward one-way bet on a rising market might not be a winning wager. It will likely be a much trickier market for money managers to navigate. But the ability to adjust gross and net exposures, and to hedge, will be important—which means that the best hedge funds will continue to outperform.