Last year was brutal for many hedge funds. Unexpected macro shifts and volatility left some managers with losses not seen since the financial crisis. Other traders were forced to close shop after clients demanded their money back. To those still standing, take heed of these lessons from what some might call the year to forget.
1. Central Banks Can Do Some Wacky Things
The Swiss National Bank and the People’s Bank of China both made unexpected moves last year that threw off hedge funds. The January 2015 surprise decision by the SNB to unpeg the franc from the euro sent the currency surging and Swiss stocks tumbling. Comac Capital returned outside money to investors after suffering losses and Everest Capital’s Global Fund shut down as a result of the decision. The PBOC’s devaluation of the yuan in August further rattled global markets.
2. Be Wary of Following the Herd
Whether it was groupthink, FOMO (fear of missing out) or a shortage of large-cap opportunities for big funds, some managers got killed piling into the same shares, and few bets were more painful than Valeant Pharmaceuticals International Inc. As of the end of June, 22 institutional investors, including Bill Ackman’s Pershing Square Capital Management and Paulson & Co., owned a stake of at least 1 percent of the pharmaceutical company, which plummeted 29 percent for the year. Combined, the 22 funds lost $40 billion in just three months. A spokesman for Pershing Square declined to comment. Paulson did not immediately reply to requests for comment.
3. Beware of Concentration
Putting a lot of eggs in a few baskets can be dangerous. David Einhorn’s Greenlight Capital, which manages $8.6 billion, saw its worst underperformance ever last year when it fell 20.4 percent, Bloomberg News reported. Time Warner Inc., which declined 23 percent in 2015, comprised 8 percent of its disclosed stock holdings. Nehal Chopra’s Tiger Ratan fund lost 19 percent last year, partly due to concentrated bets on Valeant, which made up almost 13 percent of the fund’s disclosed stock holdings at the end of the third quarter. By the end of 2015, Ratan Capital Management had just eight U.S. stocks listed in its regulatory filings. It ditched its stake in Valeant in the fourth quarter. Spokesmen for the firms declined to comment.
4. Calling the Bottom Can Hurt
Hedge funds that bet big on energy equities and credit were knocked down as oil prices fell and fell and fell. In January 2015, legendary oil trader Andy Hall said crude prices could reach a $40-a-barrel range, close to "an absolute price floor" and could see some recovery in the second half of the year. He made the comments in a letter to investors obtained by Bloomberg. Since then, WTI crude plunged 40 percent and has fallen below $30 a barrel. Hall’s firm Astenbeck Capital Management lost about 35 percent last year, according to CNBC. Overall, energy-focused hedge funds fell almost 14 percent in 2015, according to Hedge Fund Research Inc. Astenbeck did not immediately reply to a request for comment.
5. Avoid Conflicts of Interest
At least one manager came under scrutiny because of the appearance of conflicts. Albourne Partners, an adviser to institutional investors, told its clients it learned about an employee-only internal fund at Michael Platt’s BlueCrest Capital Management that posed possible conflicts. Consulting firm Aksia recommended clients pull their money, Bloomberg previously reported. In December, BlueCrest said it will return all outside capital and focus on managing Platt’s wealth and that of his partners and employees. The firm is now being investigated by the U.S. Securities and Exchange Commission over possible conflicts, people with knowledge of the matter told Bloomberg earlier this month. BlueCrest is cooperating with regulators and to date has received no accusation of wrongdoing, the firm said in a February statement.
This originally ran in a special edition of Bloomberg Brief about 2015's best performing hedge funds. View the full brief here.