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Thriving During Covid-19

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Thriving During Covid-19 SALT SALT 2020 ANNUAL HEDGE FUND SURVEY : THIRD QUARTER UPDATE The 2020 hedge fund survey published in June, which ranked the 50 top-perform- FIM Asset Management. But but so has the market’s de- STRATEGIES within each major strategy as she now believes the rise in coupling from the real econ- managers have approached ing funds over the trailing five years through 2019, found as a group they outper- equities, which she had initial- omy, explains Riutta-Nykvist. There are two main expla- risk and opportunities in dif- formed their peers and the market by a wide margin during the sharp sell-off of ly attributed to a Bear Market But she cautions volatility will nations behind why the ferent ways. Survey’s Fifty funds have 2020’s first quarter. And as markets rebounded over the next two quarters, their Rally, is likely “markets looking remain as investors increas- Two, active fund manage- forward to a time when Covid ingly recognize the growing outpaced the hedge fund in- average returns ended September far ahead of those generated by the hedge fund dustry and the market. One, ment--by managers who have has been contained and damage inflicted by Covid-19 generated consistently sound industry and the S&P 500. economies have broken out of and the uncertainty surround- uncertainty and volatility, which has so far character- returns with only moderate to by Eric Uhlfelder recession.” ing the rollout and delivery of low risk over the long term— effective vaccines. ized 2020, has created wide All would agree massive gov- performance dispersion has seemingly been better ernment stimulus has helped, at preserving capital when Return Index was 5.6%--par- adoxically the same return HISTORICAL HEDGE FUND STRATEGY PERFORMANCE THROUGH SEPTEMBER 2020 THRIVING registered by the JP Morgan Ranked Based on 2019 Returns Global Government Bond Index. (Echoing the strange- Strategy 1Q 1H YTD Net 2019 2017-2019 2015-2019 2010-2019 ness of this year, these stock 2020 2020 Returns Net (3 Year) Net (5 Year) Net (10 Year) Net Returns Returns Thru 3Q Returns Annualized Annualized Annualized DURING COVID-19 and bond indices historically 2020 Returns Returns Returns have been negatively cor- A look at how the 2020 Hedge Fund Survey’s Top 50 Funds have related.) Equity Long Bias -16.63 -4.51 1.60 15.28 6.21 4.50 5.88 Emerging Markets -16.33 -4.30 1.71 12.66 6.01 4.93 3.22 managed through the Third Quarter of 2020 BBH reports the average return of the 540 Funds of Credit Long-Only -7.58 -1.47 0.87 9.10 3.68 2.93 4.62 Hedge Funds it tracks was up Fixed Income Relative Value * -10.30 -4.63 -2.16 9.09 4.81 4.75 4.55 The Top 50 Funds compris- the average returns of the As of the end of September, Convertible Arbitrage -5.30 1.30 7.08 8.36 3.57 3.21 4.57 2.43%. Their median perfor- ing the 2020 Hedge Fund survey’s Fifty funds have out- with year-to-date returns of Global Macro -3.68 1.41 5.39 7.76 1.98 1.98 2.40 mance was slightly higher at Survey have shown resilience paced the performance of the 9.2%, the Fifty enjoyed a wide Event Driven -14.53 -4.61 0.12 7.59 4.21 4.10 4.58 2.63%. through the first three quar- hedge fund industry and the margin of outperformance Fixed Income Diversified -5.04 1.08 2.59 7.26 3.76 3.25 4.60 ters of the pandemic S&P 500 over each period. over the rest of the industry The market’s steady rebound Asset-Backed Loans -2.52 0.69 4.40 6.65 6.50 6.76 7.92 since hitting its March lows Equity Long/Short -8.54 -2.05 0.97 6.59 3.85 3.17 4.07 After SALT commissioned my The Fifty were those selected and the market. The hedge has surprised Päivi Riut- Asset-Backed Securities -21.71 -13.97 -10.23 6.57 7.60 6.98 13.61 17th annual hedge fund sur- out of a global universe of fund industry average return, ta-Nykvist, a veteran alterna- Merger Arbitrage -8.04 -1.26 0.62 6.39 3.86 5.19 4.41 vey, there were serious con- thousands of broad strate- as reported by Backstop Bar- tive investment allocator at Credit Long/Short -6.80 -1.63 1.19 6.23 3.14 2.82 4.58 cerns Covid-19 would shock gy funds with at least $300 clay Hedge (BBH), was less the €11 billion Helsinki-based Multistrategy -8.89 -3.59 -0.77 5.23 1.93 2.29 4.00 economies, markets and million in assets that had than 2%. The S&P 500 Total Commodity Trading Advisers 1.31 0.84 1.83 5.17 0.84 -0.05 0.77 managers in 2020, rendering the top trailing five-year net Mortgage-Backed Securities -11.48 -3.66 -1.20 4.67 4.69 3.87 8.84 the report’s historical findings returns. (See pages 1, 6, and Despite the limited increase in bank- Collateralized Debt Obligations -26.58 -21.58 -16.03 3.36 7.19 6.05 18.00 pretty much moot—since 7 in the original report that “ Fixed-Income Arbitrage 0.32 5.70 8.49 2.42 2.27 3.02 5.42 they were based on long-term follows for the methodology ruptcies (so far)...it may be just a matter Distressed Securities -6.95 2.42 5.03 2.28 2.23 1.90 4.59 performance through 2019.1 used in objectively identifying Volatility Trading 7.77 10.04 12.88 -0.29 -2.40 -0.48 1.29 the Top 50 funds. See pages of time, given the (scale of the) shock, But that has not been the Equity Market Neutral -2.40 -1.91 -0.54 -0.56 0.20 1.26 2.49 case. 5-14 for historical data of each before bankruptcies and unemployment of these funds, including net Backstop BarclayHedge Index -11.74 -2.63 1.69 10.64 4.98 4.20 4.77 At the end of the first, second, returns through the first three increase. ” S&P 500 Total Return Index -19.60 -3.08 5.58 31.51 15.28 11.70 13.56 and third quarters of 2020, quarters of 2020.) - Bank of International Settlements JPMorgan Global Gov't Bond Idx 4.40 5.03 5.56 6.05 2.77 2.51 3.50 Data as 29 October 2020 1 My previous 16 annual reviews of the global hedge fund industry had been produced for The Financial Times, Barron’s, and The Wall Source: Backstop BarclayHedge Street Journal. * Source of Fixed Income Relative Value is HFR SALT SALT tember. Mortgage-Backed OUTLOOK At the end of the first, second, and Asia Pacific, the hedge fund Fund Survey year-to-date Securities have rallied back to industry publication HFM In- through the 3rd quarter. Risk to Global Banks Lambropoulos expects to nearly even. Reflecting these third quarters of 2020, the average sights found 60% of investors Regardless of how for- Loan impairment charges of Bank shares struggle to see attractive investments in average losses, the survey’s are looking more favorably ward-looking allocators, Systemically Important Bank regain value versus global seven Structured Credit the longer-term distressed returns of the survey’s Fifty funds have toward hedge funds than stock values versus and markets. consultants, and managers Funds were down by more debt cycle, which government they did before the pandemic other bank stock values. outpaced the hedge fund industry and try to be, sentiment is largely than -9%. intervention will not be able struck. And 75% of investors Per cent 1 Jan 2020 = 100 to rectify. He anticipates driven by what they see in the President Trump decried the the S&P 500 over each period. believe hedge funds have de- rear-view mirror. “fundamental changes to livered material value in 2020. relentless focus on the pan- operations in a weaker macro The idea that global markets demic when he told a crowd The bottom line: two-thirds of environment will lead to credit allocators surveyed antici- could be stung by a worldwide of supporters in October The Economist Intelligence Further, he says the likeli- downgrades and a material pate increasing their hedge pandemic—that has spo- that all he hears is “Covid, Unit expresses more sys- hood that ultra-low interest increase in bankruptcies and fund exposure. radically caused lockdowns, Covid, Covid.” But Panayiotis takeovers.” temic concerns that major rates will prevail for the next sent unemployment soaring, Lambropoulos, a hedge fund developed economies may several years will also fuel the Digging deeper into the num- The Bank of International and made a mess of private portfolio manager at the $28 eventually suffer the same demand for stocks, especially bers, HFM’s found investors Settlements also shares and public finances—and billion Employee Retirement fate as Japan where there Value shares, says Siegel, viewing Equity Long/Short, Lambropoulos’s concerns. In then could largely shake off System of Texas, thinks that’s has been protracted slow which will remain the most Global Macro, and Multi- it’s October monthly report, the effects in just a month still pretty much the priority of growth, low inflation and high attractive source of liquid divi- strategy significantly more feels somewhat like Presi- 2018 2019 2020 Q1 20 Q2 20 Q3 20 it says, “Despite the limited issues facing recovery.
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