Hedge Funds, have been having a rough couple of years. Until earlier this year, the average fund tended to underperform the markets despite their high fees and structure. The argument was that it is difficult for a hedge fund to outperform when the markets just keep on trending up. That hedge funds would show their true outperformance in a choppy or bear market. This appears not to be the case. A couple of the most renowned hedge funds had big losses in November. Bloomberg writes;
Billionaires Ken Griffin, Izzy Englander and Steve Cohen posted monthly losses in November that rank among their worst ever as stock hedge funds dumped holdings at a rate not seen since the financial crisis.
Griffin’s Citadel lost about 3 percent last month, its poorest showing since the first quarter of 2016. Englander’s Millennium Management slid 2.8 percent, its third-worst month on record. Cohen’s Point72 Asset Management dropped about 5 percent, largely wiping out its 2018 gains, according to people familiar with the firms.
Another big hedge fund, Balyasny Asset Management, announced a couple days ago that it will lay-off 1/5th of its staff after negative returns in 2018. Chief Investment Officer Magazine notes;
After suffering a $4 billion asset axe from losses and client withdrawals, Dimitry Balyasny is being forced to chop heads at his hedge fund.
In November, Balyasny’s Atlas Global fund dropped 3.9%, and a leveraged variant slipped 5.7%. Atlas’ year-to-date losses are at 5.3%, while the leveraged version’s losses are down 7.9% for the year.
These are quite bad numbers considering the average hedge fund charges around 20% performance fee on top of 2% in yearly management fee. Several name brand hedge funds such as Tourbillion, Highfields and Criterion Capital have all closed this year, as they have not been able to outperform the markets.
Continued closures could come if the continued choppy markets sustain. Typically, hedge funds use some degree of leverage to help them with their performance. Big platform hedge funds such as Citadel, Millennium tend to have even larger leverage. These funds tend to have leverage equating several times their assets. This means even modest moves in the markets could have big effects on funds that are incorrectly positioned.
The markets do not necessarily need to continue downwards for hedge funds to suffer deeper losses. There is a possibility funds have positioned themselves for continued declines in the market, with a big snapback happening. This would further exacerbate their losses. Subsequently, it could lead to funds reducing their risk exposure and closing positions. As a lot of hedge funds tend to have the same type of exposure, selling would beget further selling. Considering hedge funds are rather big, their selling could then not only affect other hedge funds but also the markets.