SALT SALT

2020 ANNUAL FUND SURVEY : THIRD QUARTER UPDATE

The 2020 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 during the sharp sell-off of ly attributed to a Bear Market But she cautions 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 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 -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 -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/ -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 -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 -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 —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. debt. Given such unprece- dend-yielding investments. favorably than they did prior increase in bankruptcies in a dent Trump having believed G-SIBSStates World: All Sectors dented conditions, the EIU to the crisis. As mentioned at “We need to see the return number of economies, it may While FIM’s Riutta-Nykvist is he could get re-elected as Other Banks Banks fears “the zombification of the the start of this review, these of overall confidence before be just a matter of time, given currently optimistic, believing daily Covid-19 cases in the US global economy,” even after a were the top-performing growth can resume at normal the (size of the pandemic’s) markets will rise in the 4th soared past 100,000. ■ Source: BIS Bulletin, 9 October 2020 vaccine has begun to vanquish strategies in my 2020 Hedge levels,” says Lambropoulos. shock, before bankruptcies quarter as governments have “That won’t happen until con- the pandemic. assets sold off. And then gains of 5.4%. and, where it has not done no choice but to continue many were able to exploit sumer spending, which makes so already, unemployment Wharton School economist to massively infuse econo- And where the BBH average opportunities created by the up 68% of GDP, gets back on increase.” Jeremy Siegel disagrees, mies with liquidity, she fears returns for Multistrategy Investor Sentiment collapse in pricing to enhance track. And consumer spend- believing the US has shown it several years from now there funds—whose managers can Moreover, BIS is concerned Change in investor views of hedge funds due to returns going into the second ing won’t return in earnest un- can accommodate its growing could be an eventual reckon- invest in a variety of asset pressure on “banks to scale Covid-19* and third quarters. They til citizens (here and abroad) debt burden without dislocat- ing of the massive build up in classes—were down fraction- down lending and tighten didn’t fear a second major feel that Covid-19 is no longer ing credit markets and growth and the rise 8% ally, the survey’s 7 Multi- funding conditions, particular- drawdown was in the offing, a threat to their livelihood, prospects. One key reason he of inflation. strategy funds were up 8.8%. ly for the more risky borrow- wealth, and health. points to: innovation is a key 21% regardless of the spread and ers, has thus increased and With that in mind, she plans On the down side, Structured difference between Western 27% intensity of the virus. He also thinks strong 3rd could impinge on firms’ ability to add substantial exposure Credits funds—financially quarter growth—up 7.4% economies and Japan. The eight Equity Long- to access bank credit.” And to discretionary Global Macro 31% engineered vehicles that 13% Short funds that made the over the 2nd quarter—was when government assistance, Siegel is also sanguine be- managers to hedge her seek to capture interest flows survey were collectively up underpinned by massive gov- including loan guarantees, is cause he thinks “the fortunes current exposure to Equity across various types of debt– 30% year-to-date through ernment transfers, which have phased out, more restrictive of major market indices aren’t Long/Short, Systematic remain the industry laggards. September. The Backstop largely been exhausted. “With bank lending policies could directly linked to GDP; eco- CTAs, and Volatility Arbitrage. This broad strategy was hit 50% BarclayHedge average re- a new relief bill not likely being make it more difficult for nomic growth is dependent “Discretionary Global Macro the hardest during the first turns for such hedged equity enacted before late January, struggling firms to refinance on many small and mid-size managers will have the ability quarter because of concerns managers was 1%. (See table regardless of who is occu- debt. This raises the pros- companies that don’t trade to quickly respond to negative about interest payments and on the previous page.) pying the Oval Office, that pect, according to BIS, that publicly.” He believes re- changes across economies likely impairment of underly- leaves a still highly impaired “further deterioration in credit newed government spending and markets,” she explains. 29% 60% 62% The survey’s five Global Mac- ing asset values. While they economy pretty much on its quality amid weak prospects will boost many traditional Institutions Private Wealth Intermediaries ro managers—who invest in have substantially pared How does all this translate own,” explains Lambropoulos. for revenues could keep businesses while the tech broad benchmarks like equity back losses, Collateralized to the near-term outlook for He fears this means growth banks from writing off trou- sector is thriving from the More Favourably No Change Less Favourably and bond indices, commodi- Debt Obligations and As- hedge funds? may not only sputter in the bled loans and cleaning up many new ways it helps busi- ties and currencies—were up set-Backed Securities were In a recent survey of 54 hedge *The Survey Excludes Funds Of Hedge Funds fourth quarter and the first their balance sheet, hamper- nesses operate in a Covid and nearly 22%, easily outpacing still down in the low-to-mid fund managers and 43 inves- quarter of next year, but the ing the reallocation of funds to post-Covid world. the BBH strategy average teens as of the end of Sep- economy could then contract. tors from the US, Europe, and new borrowers.” Source: HFM Insights, September 2020 SALT SALT

2020 SURVEY OF THE TOP 50 HEDGE FUNDS : FIRST HALF 2020 UPDATE

The 2020 hedge fund survey published in June, which ranked the 50 top-performing financial health,” quips Lam- are pulling their money out of STRATEGIES turnarounds were enjoyed bropoulos,” while we’re still funds. Just as it revealed at by minimally hedged equity funds over the trailing five years through 2019, found as a group they outperformed Backstop BarclayHedge’s suffering across much of the the end of March, redemption strategies. Equity Long-Bias, their peers and the market by a wide margin during the sharp selloff of 2020’s first data shows virtually all major country.” requests by mid-year still Emerging Markets, and Event strategies have significantly quarter. And as markets rebounded in the second quarter, these funds continued to hasn’t registered any sort of Driven funds saw mid-teen Investor commitment con- rallied back close to flat for outpace the hedge fund industry and the S&P 500.1 investor nervousness. As the first quarter losses par back tinues to be borne out by the first half of the year, with world’s largest hedge fund ad- to less than -5%. Sosin the SS&C GlobeOp Forward a few having pushed into ministrator, this metric tells us Partners, (No. 1 in the survey), Redemption Indicator (see positive territory (see table institutional, high-net wealth turned its -44% first quarter venerable NYU Stern School forced to shut down. He feels next page). This measures below). and money is loss into a 9% gain. Legion Business professor and we’ll be lucky if full-year GDP the degree in which investors largely staying put. No surprise that the largest Partners Comingled (No. 27), SURVIVING finance, known as the Dean doesn’t fall by double digits. of Valuation. “It’s a crisis that He sees the $2,000 price of actually mirrors the virus: Gold reflecting inflation fears, HEDGE FUND STRATEGY PERFORMANCE: FIRST HALF 2020 COVID-19 it has punished older, more despite long rates remaining Ranked Based on 2019 Returns mature companies that used remarkably low. All the while Strategy YTD Return YTD Returns 2019 2017-2019 2015-2019 2010-2019 A look at how the 2020 Hedge Fund Survey’s to pay healthy dividends, markets had recently set new thru March thru June Net (3 Year) Net (5 Year) Net (10 Year) Net Top 50 Funds managed through the First Half and it has rewarded younger, highs. 2020 2020 Returns Annualized Annualized Annualized Returns Returns Returns of 2020 more flexible companies that Lambropoulos believes “the don’t pay dividends. That’s key to getting the economy Equity Long Bias -16.63 -4.51 15.28 6.21 4.50 5.88 Emerging Markets -16.33 -4.30 12.66 6.01 4.93 3.22 Commissioned by SALT, my average of 1.33% year-to-date almost never the case during on a more stable footing is di- Credit Long-Only -7.58 -1.47 9.10 3.68 2.93 4.62 17th annual hedge fund sur- through June, adding more a crisis.” rectly linked to mitigating the Fixed Income Relative Value * -10.30 -4.63 9.09 4.81 4.75 4.55 vey did something different than 9% from where they Damodaran trusts what the pandemic risk nationwide.” -5.30 1.30 8.36 3.57 3.21 4.57 from my previous 16 stud- ended the first quarter. market is doing in spite of his More than a half year into the Global Macro -3.68 1.41 7.76 1.98 1.98 2.40 ies—it tracked performance Event Driven -14.53 -4.61 7.59 4.21 4.10 4.58 Backstop BarclayHedge, a concerns that stocks likely pandemic, the country still of the funds that qualified Fixed Income Diversified -5.04 1.08 7.26 3.76 3.25 4.60 leading global industry data- have overreached. lacks a nationwide policy for for inclusion through 2019 Asset-Backed Loans -2.52 0.69 6.65 6.50 6.76 7.92 base, found hedge funds in Panayiotis Lambropoulos, managing the crisis. Further, Equity Long/Short -8.54 -2.05 6.59 3.85 3.17 4.07 into the first quarter of 2020. general also enjoyed substan- hedge fund portfolio manager the politicization of data Asset-Backed Securities -21.71 -13.97 6.57 7.60 6.98 13.61 Assessing the impact of the tial improvement, reducing at the $29 billion Employee and policy management is Merger Arbitrage -8.04 -1.26 6.39 3.86 5.19 4.41 Covid-19 crisis had across first quarter losses of -11.7% Retirement System of Texas, interfering with the ultimate Credit Long/Short -6.80 -1.63 6.23 3.14 2.82 4.58 all assets through March re- Multistrategy -8.89 -3.59 5.23 1.93 2.29 4.00 to -2.6%. is more confounded. He resolution of the pandemic. vealed these funds’ resilience Commodity Trading Advisers 1.31 0.84 5.17 0.84 -0.05 0.77 The S&P 500 showed the believes we are living in a And this is causing more un- during extreme stress. Mortgage-Backed Securities -11.48 -3.66 4.67 4.69 3.87 8.84 most dramatic upswing, time where facts don’t matter, certainty across all markets. Collateralized Debt Obligations -26.58 -21.58 3.36 7.19 6.05 18.00 Their returns through the first rallying from losses of nearly where markets have discon- Nevertheless, investors have Fixed-Income Arbitrage 0.32 5.70 2.42 2.27 3.02 5.42 half of the year reiterated Distressed Securities -6.95 2.42 2.28 2.23 1.90 4.59 -20% to just -3%. nected from the real econo- remained in the market, and their edge, achieving some- Volatility Trading 7.77 10.04 -0.29 -2.40 -0.48 1.29 my. He sees daily pandemic the fear that sent prices “This has been the most Equity Market Neutral -2.40 -1.91 -0.56 0.20 1.26 2.49 thing the hedge industry and cases still running high. While orderly crisis I’ve ever seen in across asset classes plum- the broad market could not in decline, he’s concerned that terms of how it has behaved meting in March, dissipated Backstop BarclayHedge Index -11.74 -2.63 10.64 4.98 4.20 4.77 deliver—positive net returns. significant unemployment still across the period,” according through summer. “It’s as if S&P 500 Total Return Index -19.60 -3.08 31.51 15.28 11.70 13.56 The 50 funds were up an could soar if regions again are JPMorgan Global Gov't Bond Index 4.40 5.03 6.05 2.77 2.51 3.50 to Aswath Damodaran, the we’ve talked ourselves into

Source: Backstop BarclayHedge 1 See pages 1, 6, and 7 in the original report that follows for the methodology used in objectively identifying the Top 50 funds. See - Source of Fixed Income Relative Value is HFR es 5-14 for historical data of each of these funds, including net returns for the first half of 2020. * SALT SALT

does warn, however, that year. But he thinks this is gin liquidating, especially with second-quarter performance SS&C GLOBEOP FORWARD FUND REDEMPTION INDICATOR THROUGH JUNE 2020 commercial real estate and unlikely. markets starting to give back was driven by shrewd asset related securities may have their recent gains? management or simply ben- 25% “Markets are acting irrational- the hardest time coming back. ly, and it’s unclear to me why Hedge funds remain the most efitting from soaring liquidity. Siegel thinks “we may be they are ignoring the obvious flexible of all asset classes, When we report third quarter seeing a permanent change in returns in early November 20% signs of risk,” exclaims Tilo whose managers, especially the value of central city office Wendorff, managing director those running smaller books (which turned especially vola- and retail space.” of absolute returns at the €16 of less than $1 billion, can tile toward the end of the quar- 15% Damodaran, despite antici- billion German alternative quickly adjust to changing ter), we may be able to better pating full GDP contraction investment manager Prime realities. distinguish which of these factors have been driving fund that could be between -10% Capital. He still believes we’re While Professor Damodaran 10% performance. and -15%, thinks we could see in a protracted Bear Market agrees hedge funds can act the market end the year up rally. While he is not liquidat- more nimbly than other more One standard throughout several percentage points. ing, Wendorff’s maintaining my 17 surveys is the longer a 5% constrained asset managers, But he cautions if the virus his defensive posture until he cites well-established fund has been staying true to turns out to be nastier than he sees the roll out of effec- evidence that the more a its fundamental approach to 0% expected, that if treatment tive Covid-19 therapies and manager can do, the more generating stable long-term and vaccines prove elusive, vaccines. returns, the more predictable 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 damage he or she can do. and if there are second and So what are investors and as- “More freedom,” he claims, their forward performance ≤ 1 Month 1-2 Month(s) 2-3 Months >3 Months third waves of infection that set managers to make of all of “has often worked against tends to be. And this is an forces the economy to again especially critical quality since a small-cap activist fund, losses virtually exceeding of the strongest showings of mium had virtually returned to this? Stay in the market, move hedge fund managers.” shut down, we could see the most of us can agree that the which had lost one-third of its 20%, saw more limited recov- any structured credit shop pre-crisis levels.” into defensive strategies, be- It’s too early to know whose market drop by 25% for the crisis is far from over. ■ value during the first quarter, ery by the end of the second during the first quarter, having This is what worried Päivi clawed its way back to just a quarter. Collateralized Debt limited losses to under 11%, Riutta-Nykvist, a veteran al- Stocks make up March losses... despite lower expectations of forward Most S&P 500 companies’ equity prices -3.8% loss. Obligations cut its losses by ended the first half of the year ternative investment allocator average EPS growth rate through 2023 have yet to recover The one Equity Long Bias 4.5% to -22%. Asset-Backed down less than 2%. at the €6.6 billion Helsin- 19 Feb 2020 = 100 Per cent 19 Feb 2020 = 100 fund that struggled during Securities reduced its losses The consensus of what’s ki-based FIM, back in May the first quarter (-14.4%) by one-third, ending the first driving this broad rally is the when she said “managers then declined a bit further (to six months of the year down commitment by governments who are currently seeing their -15.1%) through the second -14%. Most surprising was and central banks to massive- portfolios rebound will take quarter was the venerable losses in Mortgage-Backed ly flood markets with unprec- it as proof central banks will $30 billion Renaissance Securities were cut from edented levels of liquidity to protect their investments.” Institutional Equities (No. 7). -11.5% to just -3.6%. Initial contain the fallout. fears about debt repayment The fund would not comment Professor Damodaran points OUTLOOK seem, so far, to have been on its performance. But in to March 23--the day the Fed Noted Professor of Finance assuaged with the economy being quantitatively-driven, announced it was backstop- at the University of Penn- now flushed with liquidity. which likely trades with great ping the private lending mar- sylvania’s Wharton School frequency, suggests the fund Alcentra Structured Credit ket. “At the time,” observed Jeremy Siegel is more san- may have significantly rotated Opportunities II (No. 17), Damodaran, “the price of risk guine, believing the market into new holdings that failed which had declined by nearly in the equity market (equity is accurately gauging risk Q1 20 Q2 20 Q3 20 Q2 20 Q3 20 Q2 20 Q3 20 to rally with the market. -40% during the first quarter, risk premium) had peaked. and future economic activity, United States China United States Germany Big Techs Others reduced its losses to less (Amazon, Apple, Structured Credit strategies, Almost to the day, we saw and he sees little chance that Em. mkts. ex China Dev. mkts. ex US United Kingdom Facebook, Google, Microsoft & Netflix) which were the hardest hit in than -23%. Astra Structured risk capital pivot back into the markets will return to the dark the first quarter, with all fund Credit (no. 33), which had one markets. By August, risk pre- days of late winter 2020. He Sources: Bloomberg; Datastream; Refinitiv; BIS calculations. SALT 2020 SURVEY OF THE TOP 50 HEDGE FUNDS SALT

The value of this year’s in 2020. But a deeper annual hedge fund per- look at these consis- “Managers who stay faithful formance survey through tently performing funds December 2019 was revealed managers that to a proven, disciplined, risk- ostensibly turned on its as a group have largely centric investment strategy head when a pandemic been able to weather the virtually shut down the storm better than the to generate consistent returns global economy and sent market and their peers. often have the ability to securities plummeting by Eric Uhlfelder respond to a sudden drastic shock.” Hedge Fund Investing - Eric Costa, Cambridge Associates

During the Time of funds was 11.26% -- more During the first three months than 7 percentage points of 2020 as global economic a year greater than the activity collapsed, the S&P hedge fund industry average 500 lost nearly -20%. The Covid-19 return; average return of the hedge The pandemic is testing how well proven managers were pre- • The S&P 500 Total Return fund industry declined by Index (without any expens- more than -11%, according pared for an extreme shock after a decade-long bull market. es) generated 11.70% a year to data provider Backstop over the same period. And BarclayHedge (BBH). The this included the market’s average return of the funds Sometime in late February, sharp turns by consistently believes there are discernable This study identifies 50 of the S&P 500’s returns, but “Managers who stay faith- extraordinary 2019 per- that made this year’s list lost the world changed, leaving concentrating on risk and qualities that will give funda- the top long-term performing has done so with less risk. ful to a proven, disciplined, formance when the Index -7.75%. most market observers to be- recalibrating exposure in step mental equity and credit man- hedge funds, running broad And during the first quarter risk-centric investment soared 31.5%, far outpacing While markets have made lieve more than ever that past with anticipated changes in agers a performance edge, strategies with at least $300 of 2020, this same group of strategy to generate consis- virtually all active managers a substantial recovery from fund performance should be underlying conditions. especially in extraordinary million, ranked according well-established managers— tent returns often have the mindful that 2019 was the their March lows, it’s still too considered just that. It did so when the markets times. These traits, reflected to their trailing five-year net some industry leaders, others ability to respond to a sudden tenth year of a bull market; early into the crisis to have While the Coronavirus suddenly turned south in in past performance, include: returns through 2019. Also little known--outperformed drastic shock.” • Not only did the survey’s certainty about what equi- stopped much of the global the fourth quarter of 2018. • Consistent long-term included are these funds’ net the and the Rather than giving managers 50 funds’ returns virtually ties and hedge funds will do economy in its tracks, it hasn’t It quickly pivoted to profit performance and volatility returns for the first quarter hedge fund industry by a wide a mulligan for the first quarter match the market over the for the rest of 2020 and into infected the skill set of many during the strong rally in 2019. that reflects a repeatable of 2020 to capture the initial margin. during this unprecedented past 5 years, they did so with 2021, says veteran economist proven hedge fund managers. And the firm was mindful of a investment process, a clear response caused by the This doesn’t surprise Panay- crisis, Lambropoulos thinks an average annual standard and former senior partner That’s one of the key findings potential major market shift commitment to a particu- Covid-19 shutdown. iotis Lambropoulos, a hedge allocators should hold man- deviation of 7.80% versus at Solomon Brothers Henry of this year’s annual hedge going into 2020 before the lar style, and a long-term The main takeaway: Man- fund portfolio manager at agers accountable for their the market’s 11.88%; Kaufman. He believes there fund survey.¹ pandemic struck. This en- investment horizon; agers’ ability to have deliv- the $28 billion Employee performance, seeing merit will be a widespread destruc- • Their average worst draw- tion of capital across many Example. abled three of Citadel’s funds • Alignment of manager and ered consistent substantial Retirement System of Texas. in Mike Tyson’s quip: “Every- down over the same was to qualify for inclusion in this performance while having He sees a clear link between one has a plan until they get sectors, and the appetite The venerable $30 billion investors interests, including -9.1% versus -13.5% for the for risk, which was healthy year’s survey. managerial and portfolio effectively managed risk over managers who don’t jump punched in the mouth.” market; and, hedge fund shop Citadel the past five years through on hot trends and those who entering 2020, will be broadly Eric Costa, global head of transparency; and The survey’s key findings: has a record of generating 2019 has not only enabled don’t get crushed during a • And the group’s average ratcheted back as businesses impressive returns espe- hedge funds at the consul- • Stability of client base. • The average 5-year annu- 5-year annual Sharpe Ratio and consumers cautiously tancy Cambridge Associates, them to collectively track crisis. Echoing Eric Costa’s cially when markets make sentiment, Mr. Lambropoulos alized net return through was 1.84 versus the market’s weigh back into markets. believes, December 2019 of these 50 0.89. “Despite the current market ¹ My previous 16 annual hedge fund surveys were commissioned by The Financial Times, Barron's, and The Wall Street Journal. 1 2