THE WALL STREETJOURNAL. Monday, October 7, 2019|R11
Stock funds were the
topperformers in the
first-half standingsBYERICUHLFELDERHedge-Fund
Performance
Goes From Bad
To Less Bad
ALTERNATIVE INVESTING
T
he hedge-fund
industry contin-
ues todothis
year what it has
been doing for
more than ade-
cade—trailing the stock mar-
ket big time.
Hedge funds on average
generated less than half the
returnsof the stock market in
the first half of 2019, posting
a net return of 7.2%,accord-
ing to industry data tracker
BarclayHedge. The S&P 500
returned 1 8 .5%.
Performance varied widely
depending on strategy.
“Equity long bias funds” led
the way, returning more than
10.6% on average. These are
funds run by managers who
believein largely unhedged ex-
posure to the market.
One such fund,which has
generated annualized returns
ofmore than 14%sinceits
launch in 2007,isValley
Forge Capital. Manager Dev
Kantesariaguided the fund to
again of more than 34% dur-
ing the first half of the year,
continuing his commitment to
a concentratedportfolio of
less than a dozen stocks that
he’s in for the long run. The
fund focuses on large-cap do-
mestic companies purchased
at what Mr. Kantesariacon-
siders material discounts to
theirintrinsicvalue.
The second-best-performing
strategy was funds
investing in emerg-
ing markets, with
an average return
of 8 .7%in U.S. dol-
lar terms,a turn-
around from their
decline of nearly
11 %for allof2 01 8.
According to
Cheyne Capital’s
Carl Tohme,who
has generated
nearly 10% annual-
ized returns since he started
his fund in 2008, emerging-
markets investments bene-
fitedinthefirst half from
greater stability than last year
in currency markets and U.S.
interest rates,improved pros-
pects for resolution of the U.S.
trade war with China,andin-
creasing economicstimulus by
officialsinChina and Europe.
The category of “event
driven” funds was the third-
best gainer of the first half, re-
turning 6.9% on average. These
funds look for specifictriggers
that will moveastock or
credit. Leading the group was
Jason Mudrick’s Distressed
Opportunity fund, which
soared more than 29%.Fo-
cused on the tradingineffi-
ciencies of the high-yield-bond
and high-risk leveraged-loan
markets, the fund has averaged
12.3%annualized returns since
it started a decade ago.
With markets having
broadlyanticipated the Federal
Reserve bias toward higherin-
terest rates during the first
half of 2019, fixed-income
strategies (whose fortunes
tend to moveinverselywith
rates) generally trailed the
pack. Funds focused on asset-
backed loans and mortgage-
backed securities generated re-
turnsof less than 3.2%.Fundflows
Despite net redemptions of
nearly $23 billion during the
first half of the year, hedge-
fund assetscontinued torise
as returns easilyoffset that
decline. Data tracker Hedge
Fund Research reports totalin-
dustryassets rose from $3.1
trillion at the beginning of the
year to a record $3.25 trillionat the endof June. The indus-
try “concluded its strongest
first half of a calendaryear” in
terms of performance, says
HFR President Kenneth Heinz.
Several large fund launches
added to the asset count,in-
cluding the$2 billion equity
market-neutral fundWoodline
Partners, started by two for-
mer Citadel traders,Michael
Rockefeller and Karl Kroeker.
Market-neutral funds keep
their long and short exposure
roughly in line with each other.
Also in the first half,Martin
Taylor, who shut down Nevsky
Capital several years ago,
raised$1.5 billion for his new
hedged-equity shop,CrakeAs-
set Management.
Several big hedged-equity
funds, also known as equity
long/short funds, returned in-
vestor capitalin the first half,
including the$12 billion High-
fields Capital,$3.8 billion
Omega Partners and$2 billion
Criterion Capital Management.From the buyside
Volatility in markets this year
has sustainedinstitutionalin-
vestors’ defensive posture,
whichisincreasingly focused
on relative-value strategies—
investments that betonthe
realignment of securities
whose prices usually trade in
sync but have diverged.
Investing$4.5 billion of the
Florida Retirement System
Trust Fund’s money in hedge
funds,Ash Williams is defen-
sively targeting relative value,
along with broad-trend expo-
surein global macro and man-
aged futures, both of which
aim toprofit from market re-
actiontoeconomic
orpolitical events
around the world.
“When you look at
the entire global
spectrum of in-
vestible assets,” says
Mr. Williams,chief
investmentofficerof
the Florida State
BoardofAdministra-
tion, “it’s hard to
find anything that
offers reasonable
value. This begs the need for
more insurance-like exposure.”
Jens Foehrenbach,chief in-
vestment officer of the$ 14
billion funds-of-funds group
ManFRM, also figures rela-
tive value is well suited for
the markets’ growing volatil-
itysince the fourth quarter of
last year. “Prolonged sharp
price rises and falls havein-
creased spreads between as-
sets that should tradeinline
with one another,” he says,
“and relative-value managers
can potentiallyprofitbybet-
ting these spreads will likely
correct, which these dayscan
occur within several weeksor
days.”Hebelieves thiskind of
rough ride will likely remain
with usinto nextyear.
Ray Nolte, CIO of SkyBridge
Capital,which runs $6 billion
in funds of funds,alsoincludes
relative-value managersinhis
portfolio. But SkyBridge has
more than three-quarters of
its exposurein cash-flow-ori-
ented securities—including
structuredcredit andcredit
long/short funds—targeting
managers primarily focused on
consumer-relateddebtand
modestly short corporate
credit. “Volatilityis not going
to disappear anytime soon,”
says Mr. Nolte, “but I don’t be-
lieveit’s reflectiveof near-
term systemic problems.”
Still,he thinks the chance of
recessionincreasesin the sec-
ond halfof2 020 as economic
and political uncertainties
grow, especially as the presi-
dential election approaches.Mr.Uhlfelderwritesabout
global capital markets from
New York.Hecanbe reached
[email protected].Assetsin
hedge
funds
continue
to rise, to
arecord
$3.2 5
trillion.BetterbutInconsistent
First-half 2019 performance of select hedge-fund strategies; returns in percentEquity Long Bias
Emerging Markets
Event-Driven
Global Macro
Collateralized Debt Obligations
Fixed-Income Relative Value
Commodity Trading Advisers
Equity Long/Short
Credit Long/Short
Multistrategy
Distressed Securities
Asset-Backed Loans
Merger Arbitrage
Mortgage-Backed Securities
Equity Market Neutral
BarclayHedge Hedge Fund Index
S&P 500 Total Return Index
J.P. Morgan Global Gov't Bond Index10.64%
8.67
6.87
6 .62- 92
5.44
4 .2 0
4.1 3
3 .92
3.5 9
3.35
3.16
3.05
2.1 2
- 77
7.24
18.54
4.98
- 77
Jan-June 2019 Net Returns
–0.25%
1.86- 62
1.8 7
4.1 8 - 77
3 .11
–0.6 7 - 21
–1.2 6
–2. 55
6 .2 4 - 22
2.6 8
- 2 .7 1
1.11
10.42
6 .1 4
1-Year Net Returns
7 .53%
6 .5 6
6 .4 1
2.44
13.2 9
4 .72
–0.4 6
4.3 6
3.8 3
2.50
6 .4 1
7.1 8- 02
5 .46
0 .8 1
5 .74
14.19
1 .2 2
3-Year Annualized
Net Returns
3.49%
3.3 0
2.9 2
2.5 6
7.1 0
3.4 0
1.1 2
2.80
2 .6 5
2.3 7- 01
7.3 1
4.2 4 - 33
1.6 7
3.3 8 - 71
3 .1 7
5-Year
Annualized
Net ReturnsNote: Ranked based on first-half 2019 net returns
Source: BarclayHedge, HFR (data for Fixed Income Relative Value)CME Group is a trademark of CME Group Inc. The Globe logo is a trademark of Chicago Mercantile Exchange Inc. All other trademarks are the property of their respective owners.
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