It has been a difficult year so far for hedge funds. Heightened market volatility and macro headwinds have encouraged investors to pull their money at the fastest pace since 2016.
In the first seven months of the year investors withdrew $56bn from hedge funds, with redemptions totalling $8.4bn in July alone. As of 22 August just 37% of hedge funds have had net inflows in 2019, according to eVestement data. A rebound in returns did however see total assets under management grow to $3.3tn in July.
Redemptions were highest in hedge funds betting on stocks, with $25.5bn lost to outflows over the same period.
Hedge fund outflows in the first seven months of 2019
Head of research at eVestment Peter Laurelli said investors are “souring on disappointing returns or returns that don’t meet expectations for the cost they’re paying.”
The Argentine ‘minefield’
Some hedge funds have been hit particularly hard by troubled investments in Argentina. On 11 August, investors were shocked by President Mauricio Macri’s poor performance in the primary elections as he began his bid for re-election. The results had an immediate effect on markets, with the peso losing more than a fifth of its value against the US dollar.
Concerns arose quickly around the likelihood of opposition candidate Alberto Fernandez being elected alongside running mate and former President Cristina Fernandez de Kirchner, and how this would affect Argentina’s economy in the long-term
Investors considered the possibility of protectionist policies being introduced and the nation’s debt being restructured.
One of the biggest losers was Autonomy Capital, shedding $6bn and recording a -16.3% return in the first two weeks of August. Nonetheless, the fund’s founder and CIO Robert Gibbins (as pictured above) told investors the selloff “presents an opportunity”.
This comes off the back of a strong 2018, with Autonomy up 17% and one of the top performing hedge funds in the market.
Autonomy Capital's 2018 return
VR Capital’s flagship fund exhibits a similar narrative, having lost 14.5% this month to 16 August, ending a strong run recorded just one month earlier, the fund up 10.3% in July.
Despite this, some global hedge funds have had their best start to the year since 2009. Laurelli said 2019 has so far logged some of “the best returns the industry has broadly seen in almost 10 years, but it is still below an equal-weighted equity and bond benchmark.
He added however, “I don’t know that the assumption should be [that] there will be a general turnaround to the industry.
“We’ve seen a lot of high profile fund closures over the past couple [of] years, and I can’t see any reason why that wouldn’t continue.”
Closer to home
Ongoing Brexit negotiations are also posing problems for the market, adding to volatility as the debate surrounding a deal or no-deal continues.
However, former chairman of Goldman Sachs’s Asset Management Jim O’Neill argued that Boris Johnson’s push towards a no-deal is something of a “free lunch” for hedge funds and currency traders trading off the collapse of the pound.
O’Neill told the BBC Radio 4 World at One programme in July that his former colleagues in the industry saw a no-deal Brexit as a “chance to make some money” and some government figures were allowing traders to benefit by “deliberately promoting the no-deal Brexit risk”.
“A free lunch” - Jim O’Neill on Boris Johnson's no-deal push and what it could mean for hedge funds
He said: “I’m pretty sure a lot of big foreign exchange and hedge fund type people are… probably looking at what’s being said coming out the UK as almost close to a free lunch. The world I was in, a lot of them are saying: ‘Thank goodness for Boris. He’s giving us a chance to make some money.’”
Vanda Global Fund bucks the trend
One global hedge fund that’s outperforming the wider trend is Chong Chin Eai’s Vanda Global Fund.
Launched in 2016, the fund was just months-old when it fell by more than 50% – a victim of the fallout caused by Trump’s victory in the US presidential race. Three years on, the Singapore-based fund is the world’s best-performing hedge fund in the market.
According to Eurekahedge Pte data, the Vanda Global Fund was up 278% through July, and delivers an annualised return of 40%. Vanda now has $194m assets under management, with Chong aiming to raise another $20m in the next 12 months.
The Vanda Global Fund's year-to-date return
The fund specialises in exchange-traded futures. It’s a risky investment as they involve the trading of a contract, that stipulates the buying or selling of an underlying security, and is a form of derivatives trading based on ETFs. To showcase that volatility, in 2017 Vanda was up 260%, but then fell 49% the following year. However, with the fund soaring this year, the risk looks to have paid off for investors.
Despite a rocky start in 2016, Chong told Bloomberg: “I wanted to show investors the flow of the fund and the growth of the fund, both in terms of the performance and also in myself.”
Chong plans to reach $500m assets under management in the next four years.