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Bearish hedge funds suffer as equities rally

Hedge funds betting on a sharp drop in global equities suffered further this quarter, while the broader industry’s returns lagged behind those of US and European stocks.

The flagship fund of Crispin Odey, who for several years has been warning of a violent bursting of a bubble inflated by central banks, is narrowly down for the year. The fund endured a nearly 50 per cent decline last year, making it the worst performer among large global hedge funds.

Horseman Global, which is also based in London and fell more than 24 per cent last year, has lost further ground this year. It had declined more than 7 per cent as of mid-March, according to investor documents.

Global equity markets have extended their post-US election gains in 2017, with better economic data in China and the eurozone also bolstering sentiment. The FTSE All World index has risen nearly 7 per cent so far this year.

Hedge Fund Research’s benchmark of hedge funds across all investment strategies was up 2.23 per cent through to mid-March. Emerging markets, fixed-income relative value arbitrage and equity strategies have fared the best, while macro and energy funds have fared the worst, according to HFR.

Horseman Capital’s flagship Global Fund remains 11 per cent net short, but it has reduced its bearish bets on emerging markets. Russell Clark noted in his most recent letter to investors that “in the end it looks like China has managed to enact capacity cuts that have reduced the risk of a major financial crisis”. Mr Clark said he remains short developed markets.

However, Karim Leguel, the head of hedge fund solutions for EMEA at JPMorgan Asset Management, said that nervousness over the sustainability of the post-election rally for US equities has meant some of his clients are betting on hedge funds providing an insurance policy should there be a sudden sell-off.

“What we are getting is a lot of clients staying invested in hedge funds, or having a lot more discussion than last year about allocating. I think a lot of investors are uncomfortable with where equities have run up to and with rising rates and upcoming volatility, they see hedge funds as a strategy that could do well”.

Other equity-focused hedge funds that had endured a difficult 2016 have begun the year on a firmer footing. Lansdowne Partners’ flagship Developed Markets Fund, which suffered a 15.22 per cent decline last year, has started the year in positive territory, while its Energy Dynamics fund is one of the best performers of the year, returning about 8 per cent.

The industry is seeking to rebound after a rough 2016, when the number of fund closures was the highest since the financial crisis and the number of launches was the lowest since then.

Most recently, the hedge fund of Goldman Sachs’s youngest-ever partner, Eric Mindich, decided to shut down after enduring a 9 per cent drop in 2016, while Richard Perry’s Perry Capital also decided to close its doors last year after 28 years in business. Other funds, such as Alan Howard’s Brevan Howard and John Paulson’s Paulson & Co, suffered steep redemptions.

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