Cookie consent

We use cookies to improve your experience on this website. By continuing to browse our site you agree to our use of cookies. Tell me more | Cookie preferences

Hedge funds storm back into form

Hedge funds are seeing good returns this year, despite market woes.

Story highlights

  • 2013 has delivered strong returns for hedge fund managers
  • Hedge funds underperformed most major markets for four years running
  • Industry gusto boosted by the belief that the eurozone crisis has been brought under control

With crisis in Cyprus, gloom in the UK's Budget and growing fears of a correction in the US Treasury market, you could be forgiven for thinking markets were as turbulent as ever.

For some, though, the sun is shining: 2013 has seen some of the strongest returns from hedge fund managers in years.

So much so that many managers are quietly speaking of a return to form for the $2tn global industry -- which has hardly covered itself in glory since 2008.

On average, hedge funds -- once known for their high-octane, high-earning trades and outsize manager pay cheques -- have underpeformed most major markets for four years running.

Indeed, excluding 2009, when assets everywhere rallied, the past three years have been dismal. The average fund made just 11 per cent during the entire period, according to Hedge Fund Research.

'Slow death of the European project'

    Just Watched

    'Slow death of the European project'

'Slow death of the European project' 03:32
PLAY VIDEO
Barnier: Give bankers responsibility

    Just Watched

    Barnier: Give bankers responsibility

Barnier: Give bankers responsibility 03:45
PLAY VIDEO

Compare that with performance for the first two months of this year: up 2.7 per cent for the average fund and just under 4 per cent for the average equity-focused fund manager, HFR data show.

Most top-tier funds have performed far better.

"If you look at CNBC, then everything is in crisis; but if you look at price action, most of the problems this year have been ignored in the markets," says Luke Ellis, president of Man Group, the world's second-largest hedge fund manager. "It feels relatively easy to pick stocks now after a period where trying to make a return out of anything was very hard."

Not that anyone is quite prepared yet to declare the hedge fund industry's fortunes reversed. Rallies -- and subsequent disappointments -- have been a hallmark of the past few years.

"There was definitely a moment in the first quarter of last year where it felt like things were picking up," says Mr Ellis. "And then look what happened. There was definitely a moment like that in the first quarter of 2011 too."

In 2012 the average hedge fund made just over 6 per cent, while in 2011 the average fund lost just over 5 per cent, according to HFR. The S&P 500 rose nearly 13 per cent during the same 24 months.

The proof, says Mr Ellis, "usually seems to come in the second quarter". This year, though, managers are more confident of their chances, even if it is only March.

Indeed, what aggregated performance numbers obscure are some of the more structural reasons why many are more bullish about the markets they are navigating, and the opportunities these provide.

In particular, of course, it is managers' belief that the eurozone crisis -- notwithstanding recent events in Cyprus -- has been brought under control that has boosted industry gusto.

Politicians' and central bankers' apparent commitment to solving the problems in the financial system -- or at least indefinitely propping it up -- have begun to be felt as a "solid floor under markets for the first time", says one leading equity fund manager. And that leaves non-macro managers to concentrate on the details they prefer.

"This year is going to be one of a return to more normal markets where fundamentals play a much more important role," says Melissa Carnathan, EMEA head of capital introductions at JPMorgan. "Fundamentals are going to start having a much bigger impact."

In terms painted with the broadest brush: companies, and not countries, are where opportunities may now lie.

Equity long/short managers -- which focus on going long and short stocks -- have stood out from the crowd in recent months, with many of the sector's biggest names posting large returns.

Lansdowne Partners, Europe's largest equity long/short manager, has seen its flagship fund rise 7.75 per cent in the year to March 8, according to an investor.

Odey Asset Management, another UK-based equity long/short equity fund, has performed well too. Its flagship fund is up 11.5 per cent so far this year.

Some are faring even better. Sloane Robinson's global fund is up 17 per cent for the year to March 8.

In the US, too, equity-focused managers are faring well. Glenview Capital's flagship fund was up just under 11 per cent in the first two months of the year. Leon Cooperman's Omega Advisors has had a strong start too, and was up 6.5 per cent at the end of February, according to an investor.

Two measures point to further good returns for such managers: correlation and dispersion.

With correlation between stocks lower and dispersion higher, managers are better able to use their skill to identify idiosyncratic opportunities.

Investors in hedge funds are following the returns too.

"Many investors had rotated out of equity long/short funds into macro and credit, but last year had a very bullish equity market and investors noticed that," says Ms Carnathan. "Now they are trying to rectify their underexposure. We are seeing a lot of inquiries. We have had more inquiries than in a long time."

Not that those investors - many of them now pension funds and other large, conservative institutions - expect a great amount. "A number of years of muted performance have led people to finally adjust their expectations," says Ms Carnathan. Where hedge funds once promised returns of 20 per cent or more, now 8 per cent will do.

      CNN Business

    • An Iraqi worker adjusts a control valve at the Daura oil refinery on November 5, 2009 in Baghdad, Iraq. Iraq and a grouping of U.S and European oil companies Exxon Mobil Corp and Royal Dutch Shell PLC signed a $50 billion contract today to develop the West Qurna oilfield, two days after the Iraqi South Oil Company signed a technical service contract with Britain's BP and China's CNPC to develop the Rumaila oilfield. The Iraqi government is trying to attract foreign investment, especially in the oil sector, in hopes of reviving its war-torn economy. Iraq has the third largest oil reserve in the world but it is producing way below its potential. (Photo by Muhannad Fala'ah/Getty Images)

      Airstrikes, rebels seizing control of oil fields, plus a severe refugee crisis are a recipe for market panic. So why are Iraq oil prices stable?
    • A view of gloves and boots used by medical staff, drying in the sun, at a center for victims of the Ebola virus in Guekedou, on April 1, 2014. The viral haemorrhagic fever epidemic raging in Guinea is caused by several viruses which have similar symptoms -- the deadliest and most feared of which is Ebola. AFP PHOTO / SEYLLOU (Photo credit should read SEYLLOU/AFP/Getty Images)

      The biggest Ebola outbreak in history is taking its toll in Western Africa, hitting some of West Africa's most vulnerable economies.
    • People enter a casino in Las Vegas, Nevada, on April 18, 2009. Las Vegas is the most populus city in the US state of Nevada and internationally renowned major resort city for gambling, shopping, fine dining and entertainment. Las Vegas which bills itself as the �Entertainment Capital of the World� is famous for the number of casino resorts and associated entertainment. AFP PHOTO/Jewel SAMAD (Photo credit should read JEWEL SAMAD/AFP/Getty Images)

      Macau has overtaken Switzerland in the wealth stakes, being named the world's fourth richest territory by the World Bank.
    • spc marketplace middle east ata atmar a_00010015.jpg

      Saudi Arabian Bateel brand is best known for its delectable dates but it now has more than a dozen cafes and a new bakery in the works.
    • Vantablack designed by Surrey NanoSystems absorbs 99.96% of all light. It however will not be the solution to the creating the world's ultimate slimming black dress! A dress made out of this material would render the curves and contours of the human body invisible and would leave the wearer looking like 'two dimensional cardboard cut-out.'

      A British nanotech company has created what it says is the world's darkest material. It is so dark the human eye can't discern its shape and form.
    • Jibo robot is designed to be an organizer, educator and assist family members. CNN's Maggie Lake met him and says she was impressed with his skills.
    • A picture taken on March 15, 2014 shows children playing at the sprawling desert Zaatari refugee camp in northern Jordan near the border with Syria which provides shelter to around 100,000 Syrian refugees. Syrian refugees in the seven-square-kilometre (2.8-square-mile) Zaatari camp in Jordan fear that President Bashar al-Assad's likely re-election this year will leave their dream of a return home as distant as ever. The brutal war in Syria between the regime and its foes shows no sign of abating and has killed at least 146,000 people since it erupted in mid-March 2011. And 2.5 million Syrians have fled abroad and another 6.5 million have been internally displaced. Jordan is home to more than 500,000 of the refugees.

      Sandwiched in between Iraq and Syria, Jordan's destiny seems to be one of a constant struggle for survival. John Defterios explains.
    • SHEFFIELD, ENGLAND - NOVEMBER 18: Queen Elizabeth II wears 3 D glasses to watch a display and pilot a JCB digger, during a visit to the University of Sheffield Advanced Manufacturing Research centre, on November 18, 2010 in Sheffield, England. (Photo by John Giles - WPA Pool/Getty Images)

      At the last football World Cup, it was all about 3D. This time around, it's nothing less than 4K.
    • An Iraqi worker adjusts a control valve at the Daura oil refinery on November 5, 2009 in Baghdad, Iraq. Iraq and a grouping of U.S and European oil companies Exxon Mobil Corp and Royal Dutch Shell PLC signed a $50 billion contract today to develop the West Qurna oilfield, two days after the Iraqi South Oil Company signed a technical service contract with Britain's BP and China's CNPC to develop the Rumaila oilfield. The Iraqi government is trying to attract foreign investment, especially in the oil sector, in hopes of reviving its war-torn economy. Iraq has the third largest oil reserve in the world but it is producing way below its potential. (Photo by Muhannad Fala'ah/Getty Images)

      Iraq produces 3.3 million barrels per day and has the world's fourth-largest oil reserves. But the current crisis is putting all this in danger.
    • Valves of gas pipe-line are seen in the gas station not far from Kiev on March 4, 2014. The European Union will help Ukraine pay the $2.0 billion it owes to Russian gas giant Gazprom, a top official said Tuesday, as part of an aid package reportedly worth more than one billion euros. AFP PHOTO/ ANDREY SINITSIN (Photo credit should read ANDREY SINITSIN/AFP/Getty Images)

      The gas standoff between Russia and Ukraine could have a knock-on effect on Europe. Explore this map to find out why is the EU nervous.