“While this is a wild ride, please know that it isn’t our first rodeo. It is just another one of the many big shocks that we have been through,” Ray Dalio, founder of Bridgewater Associates, wrote to clients in March as markets collapsed.
He had published the message in an attempt to make things “clear” about the firm’s “disappointing” results during the crash — its Pure Alpha fund was down 21% at the time. Dalio admitted that the impact of the coronavirus came at “the worst possible moment” because the firm had been long on most of its positions.
Bridgewater’s Pure Alpha II strategy experienced losses of 16% in March, which led to the firm ending the quarter down about 20%, Bloomberg reported. According to an SEC filing seen by Business Insider, the hedge fund exited 153 positions in the second quarter and reduced its holdings in a further 177 investments.
“While this is a wild ride, please know that it isn’t our first rodeo. It is just another one of the many big shocks that we have been through” - Ray Dalio, founder of Bridgewater Associates
Dalio is not the only hedge fund titan to see their business underperform this year. Another is Michael Hintze, founder of asset management firm CQS.
While the CQS’ Directional Opportunities fund may have gained 1.3% in August, that did little to make up for the 48% loss it made between February and May, according to Bloomberg. His portfolio lost 33% in March alone, making it the worst month in the hedge fund’s history.
Ray Dalio's portfolio losses in March
The Eurekahedge Hedge Fund index may have fallen 6.5% during the crash, but not all hedge funds underperformed. There are some that managed to stay one step ahead of the broader market.
What were these hedge fund managers buying, and what strategies did they use to make bank from the stock market volatility?
Complex credit derivatives prove lucrative
As people stayed away from shopping centres and in-store sales slumped, Saba Capital looked to gain from the woes of brick-and-mortar retail.
Founded by Boaz Weinstein, the firm returned 90% in the first half of the year, according to data compiled by Bloomberg. It added profit every month by trading credit and derivatives of companies like retail chains Staples [SPLS] and Macy’s [M] as well as the now-disgraced payment company Wirecard [WDI].
As more and more countries went into lockdown and borders closed, transport, shipping and logistics were disrupted, leading to a major decline in demand for oil. Seeing an opportunity to make some returns, Pierre Andurand, founder of oil-focused hedge fund Andurand, established a short position in early February by buying put options and shorting futures.
Saba Capital's returns in first half of 2020
Andurand reportedly began analysing the potential global impact of COVID-19 back in January, when the outbreak was thought to be restricted to China. His bet paid off and resulted in the London-based firm having its best month on record in March. The Andurand Commodities Fund returned more than 60% during the month, according to Bloomberg data, while the Commodities Discretionary Fund returned 154.7%.
Alan Howard, co-founder of macro trading firm Brevan Howard, was another manager who enjoyed one of the best periods of his investment career to-date. Better known for delivering mediocre returns over the last several years, his firm’s flagship Master Fund gained 18.3% in March — the most since it began trading in 2003 — and a total of 23% for the first quarter.
According to Bloomberg News, the success is down to a combination of long bets on US rates and put options on Brent crude, which were boosted by falling energy prices.
Hedge funds turn to China amid US trade spat
The coronavirus pandemic caused chaos for stocks in the US and China. Following the huge rally in equities in both countries since March, the situation could worsen given rising trade tensions. This has left some investors with a double headache.
In anticipation of the tit-for-tat trade war escalating in the run up to the election in November, Singapore’s APS Asset Management has shifted its portfolio to focus more on domestic stocks in China that are well-placed to weather any hostilities. Kok-Hoi Wong, chief investment officer at the firm, has pulled out of holdings in US companies that rely on China for a chunk of their revenue.
Wong believes armed conflict is more a probability than a possibility. In early August, he told Bloomberg that he thought “markets will panic and crash”, and as such he suggested the firm had chosen not to position its portfolio “too bullishly or aggressively”.
In the first seven months of the year, Wong’s APS China A Share fund delivered returns of roughly 29%, double that of the CSI300 index.
APS China A Share fund's returns in first 7 months of 2020
Spotting signals early
Uncertainties surrounding the pandemic are likely to continue until a vaccine has been found. Bill Ackman, founder of Pershing Square Capital, described the situation best when stating that the pandemic resulted in an “artificial, temporary shutdown” that was driven by health reasons and not economic ones.
Though notorious for being a long-player, in a bid to protect his portfolio Ackman spent $27m on credit protection on investment grade and high-yield bond indexes, which quickly turned into $2.6bn.
By the end of March, he had reinvested a significant proportion of the gains made, adding to existing long-term positions and re-building a position in Starbucks [SBUX], according to Forbes.
Ackman’s success is indicative of the general approach that’s been taken by hedge fund managers who have managed to outperform so far in 2020. They recognised the crisis and spotted the signals early.