Market turmoil splits hedge funds into macro winners and tech losers

Market turmoil triggered by Russia’s invasion of Ukraine is increasing inflation has sharply divided the hedge fund industry, with macro hedge funds enjoying one of their best starts to the year ever, while tech and growth funds post double-digit losses.

The top 10 percent of hedge funds gained an average of 24.3 percent in the first quarter, while the bottom decile fell 15.4 percent, according to HFR, which tracks the sector. The spread is one of the largest since the financial crisis.

The industry as a whole fell 0.3 percent in the first quarter, as measured by the HFRI fund weight index, and larger funds tended to outperform small ones.

“It’s hard for me to think of a quarter with more diversification in a long time,” said Michael Edwards, deputy chief investment officer of Weiss Multi-Strategy Advisers.

Many long-short equity hedge funds reduced exposure to US equities and reduced leverage when the market sold off in January and February, fearing there was still room for equities. According to Goldman Sachs’ prime brokerage arm, they stayed on the sidelines and continued to reduce their positions as the market finally took hold.

This meant some funds missed a 9% rally in the S&P 500 from its February lows, including many of the technology stocks that had suffered badly earlier in the year. That drove the HFRI index for equity funds down 4 percent.

Tiger Global was among the most affected: It’s down 34 percent for the quarter. Melvin Capital, Whale Rock and RiverPark’s long/short fund were down more than 20 percent for the quarter as consumer, technology and growth stocks in general struggled. The problems with the technology were not limited to the US. Accendo Capital fell 17.8 percent as one of its largest holdings, Swedish telecoms maker Hexatronic, gave up some of last year’s gains.

In contrast, computer-controlled and macro funds rallied strongly, with the HFRI’s macro index up more than 8 percent for the quarter.

Those gains, Edwards added, were in part due to macro-quant funds being traded systematically. Without the mutilation of human sensibilities caused by the war in Ukraine, the rise in government bond yields and the sell-off in the markets, computer-controlled funds were back in the fray faster than some flesh-and-blood hedge fund managers.

“Machines are not subject to the same fomo [fear of missing out] and wound-licking tendencies that are money managers,” he said.

Among the biggest gainers this year is the BH-DG Systematic Trading fund, run by a joint venture between hedge fund firm Brevan Howard and former Chase Manhattan trader David Gorton. According to the figures sent to investors, the fund gained 23 percent by the end of March.

Meanwhile, Leda Braga’s Systematica is up nearly 18 percent, helped by bets on commodities and bonds, and Aspect Capital is up 21.5 percent in its diversified fund.

Bridgewater, the world’s largest hedge fund with around $150 billion in assets under management, rose 16.3 percent. It told investors that its peak performances came from commodities, short-term interest rates and nominal bonds.

Many of the winning funds use algorithms to predict and bet on trends and patterns in futures and other financial markets. They benefited from that a huge sale in Treasury markets this year, with 2-year US Treasury yields soaring from 0.7% to 2.4% and 10-year yields from 1.5% to 2.5%, as the US Federal Reserve aims to tighten monetary policy.

“This year so far [performance] is spectacular,” said Philippe Jordan, president of Paris-based CFM, which has around $9 billion under management and is up around 17 percent in its Discus strategy and around 7 percent in its flagship fund, Stratus. “The macro backdrop for [quant] Futures trading is better than it has been in the last 10 years.”

The HFRI commodity fund index rose nearly 25 percent, driven by a one-third rise in crude oil prices and a nearly two-thirds rise in natural gas prices. Makuria Investment Management, which invests in commodities and companies involved in the energy transition, gained 31 percent. “The tragic events in Ukraine have only accelerated already existing structural trends in commodity markets. . . by further increasing market tightness,” wrote founder Mans Larsson.

Other traders have also benefited from the huge market moves in bonds and currencies. Odey Asset Management’s European fund is up nearly 61 percent through mid-March, helped by bets on rising long-dated bond yields. He believes they need to go further. “There’s nothing holding back returns here,” said founder Crispin Odey.

Equity hedge funds have had a much harder time. Funds with an upward bias suffered losses as equity markets suffered from the war in Ukraine and the prospect of higher borrowing costs, and bond markets sold off quickly.

“Extreme volatility in the interest rate market and the Ukraine The situation created a difficult risk environment for all asset classes,” said Kevin Russell, chief investment officer at UBS’s hedge fund unit O’Connor, which has over $11.2 billion in assets under management. Market turmoil splits hedge funds into macro winners and tech losers

Adam Bradshaw

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