Mixed Returns

The Lessons of 2017 for Hedge Funds

Three lessons to draw from 2017's hedge fund returns.
Photographer: HENRY ARDEN/Getty Images/Cultura RF

As funds start to post their returns for 2017, a sharp divide is emerging between the winners and losers.

Michael Platt had a banner year, beating his near-50 percent gain in 2016 with a 54 percent return last year, according to Bloomberg News. Alan Howard, by contrast, suffered his worst annual decline since opening for business in 2003, losing 5.4 percent in 2017.

Here are three conclusions to be drawn from the performance figures.

Managing money beats running a business. 

Platt gave about $7 billion of money back to his clients two years ago. His Bluecrest Capital Management is thriving as a private investment firm focused solely on managing the wealth of Platt and his partners.

The Good, The Bad and The Ugly

2017 saw a wide divergence in returns for some of Europe's best-known fund managers

Note: Hendry's returns are to the end of August

Dispensing with the need to justify trading decisions on a monthly basis -- especially when they go awry -- is clearly liberating. The ability to ride out short-term losses without clients either questioning your sanity or withdrawing their capital removes a potentially damaging distraction -- which suggests an alternative remedy for the woes Howard is currently suffering.

And the ability to leverage high-conviction trades using borrowed money to an extent that would make external investors nervous has probably helped turbocharge Platt's returns. He said in November 2016 that leverage "played a strong part" in juicing that year's performance.

Managing less money may also help. Under the old fee structure of "2 percent of assets, 20 percent of returns," the bigger the asset base, the greater the temptation is to focus on playing it safe to preserve the 2 percent income rather than risking that by trying to expand the 20 percent side of the equation.

Taking the rough with the smooth.

The performance of Hugh Hendry's Eclectica fund before it was shuttered illustrates an adage that investors in hedge funds would do well to remember: The risk-taking associated with delivering out-sized returns means there will also be periods of under-performance.

The Cost of Protection

Hugh Hendry: "My role is to diversify your risk portfolio."

Source: Eclectica, Bloomberg

Note: Returns for 2002 are from fund's inception in September, returns for 2017 are until end of August

Hendry did exactly what he promised his investors. His returns offset the S&P 500 index in its lacklustre years (notably 2008, 2011 and 2003) but trailed the benchmark when it posted stellar gains.

Are clients willing to suffer through the bad times and take a long-term view? The experience of Brevan Howard, which has seen its assets under management decline by three-quarters from a high of $40 billion, suggests not.

Global Macro remains challenging -- at best.

For several years, the investment style known as global macro has struggled with bond and currency markets at the mercy of central banks.

Tough Times for Macro Hedge Funds

2017 returns lagged other investing styles

Source: Eurekahedge via Bloomberg

A lack of price action hasn't helped. Merrill Lynch's MOVE index of U.S. fixed-income volatility averaged 56 points last year, down from 72 in 2016 and 81 the previous year. Deutsche Bank AG's foreign-exchange volatility index averaged 8.3 in 2017, down from 10.43 in 2016 and 10.21 in 2015.

But this year could -- and I emphasize the "could" -- be different. Whisper who dares, but bond yields are starting to edge higher, led by a near-doubling in two-year Treasury yields in the past year to just shy of 2 percent.

The Federal Reserve is now clearly on the path to normalizing monetary policy, the Bank of England implemented its first interest-rate increase in a decade in November, and even the European Central Bank is scaling back its quantitative easing program.

"I fear we might look back and say `where were all the macro hedge funds?'" Hendry said in September after throwing in the towel after 15 years and shutting his Eclectica Fund.

Macro managers will struggle to retain or attract money just when investors might need them most.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Mark Gilbert in London at magilbert@bloomberg.net

    To contact the editor responsible for this story:
    Edward Evans at eevans3@bloomberg.net

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