Brevan Howard, led by Alan Howard, delivered one of the surprises of the year
Brevan Howard, led by Alan Howard, delivered one of the surprises of the year © Alamy

Buoyed by growing interest from institutional investors, 2018 was supposed to be the comeback year for hedge funds.

It has not worked out that way. Stalling global equity markets, compounded by sharp sell-offs in February and October, have thrown the $3.31tn sector off course.

Investors pulled a net $10.1bn from hedge funds in the year to October, according to eVestment, the data provider.

European-domiciled groups have been hit particularly badly, with net outflows of $12.8bn over the 10 months, down from net inflows of $28.9bn last year. By contrast, the Americas have had net inflows of $3.86bn and Asia net outflows of $650m.

The reasons for this are opaque, says Peter Laurelli, eVestment’s head of research, though lower returns have probably played a part.

The average return for European-domiciled funds for the ten months was minus 3.7 per cent compared with minus 2.6 per cent globally. Continental funds fared worst, returning minus 4.82 per cent, while the UK was minus 3.12 per cent.

October was an especially bad month but for the year as a whole there have been redemptions across various strategies. Despite a huge surge in interest in quantitative managers, many “commodity trading advisers” — computer-driven trend-following funds — have had a bad year.

There have been bright spots too. Some macro funds, which bet on the global economy via interest rates, currencies and bonds, have performed well due to volatility in emerging markets and the rising US dollar.

Discretionary funds have also done well, offering succour to more active managers. “It is interesting that we’ve seen the more discretionary focused managers do better in this environment,” Mr Laurelli says.

The month-to-month performance of individual groups has been almost as choppy as the market. With a few weeks left till the end of the year there is time to recover . . . or flounder.

FTfm takes a closer look at the mixed performance of five of Europe’s biggest hedge fund names.

Brevan Howard

Brevan Howard, led by Alan Howard, delivered one of the surprises of the year
Brevan Howard, led by Alan Howard, delivered one of the surprises of the year © Alamy

Among the world’s best-known but most secretive macro hedge funds, Brevan delivered one of the surprises of the year.

The firm was once considered the gold standard among hedge funds. It became a must-have fund following gains of 20 per cent in its main fund during the 2008 financial crisis and, before 2014, it had a record of making money every year. All this propelled assets to about $40bn.

In recent years, however, its fortunes turned. A move by traders, including co-founder Alan Howard, to Geneva was seen as a mis-step. It also lost star manager Chris Rokos. The firm chalked up three calendar years of losses between 2014 and 2017. Assets have dropped to just $6.8bn as clients fled.

Brevan entered 2018 in bad shape. This meant that its table-topping performance came as a surprise. One driver has been a particularly well-timed bet on Italian bond spreads widening. Mr Howard’s style is to place bets on sharp market dislocations, which can mean his portfolios do little for a long time before suddenly reaping huge gains. This proved the ideal way to profit from the turmoil in May, when Italian two-year bonds suffered their worst day in decades.

Brevan’s main fund is up by a net 12.3 per cent this year, said a person who has seen the numbers, while a punchier fund run personally by Mr Howard has made much bigger gains.

A spokesman for Brevan declined to comment.

Man Group

Luke Ellis, chief executive of Man Group
Luke Ellis, chief executive of Man Group © Bloomberg

The overarching industry narrative of more actively managed strategies making returns while quantitative funds suffer has played out at Man, the world’s largest publicly traded hedge fund group known for its computer-driven equity strategies.

Strategies in AHL and Numeric, its computer-driven trading units that use computer algorithms to make investment decisions, generally performed poorly. The worst performer for the nine months to September was the Numeric Emerging Markets Core strategy which was down 8.7 per cent on a net basis. The star was the GLG Continental European Growth Fund, part of the group’s discretionary trading unit, which has had a year-to-date return of 7.5 per cent net.

Assets at Man, which is led by Luke Ellis, rose to a record $114.1bn in the third quarter but the London-listed company’s share price has declined by almost 30 per cent since the beginning of the year.

Analysts are split over the medium-term outlook. “Despite a somewhat dull period for investment performance, we continue to believe that Man . . . operates a superior business model within the active asset management space,” said Paul McGinnis at Shore Capital.

Yet there are “many short to medium-term uncertainties at Man, including inconsistent performance/performance fees, volatile flows and fee margin pressure,” according to David McCann, analyst at Numis.

Man declined to comment.

Lansdowne Partners

For one of the world’s biggest and most successful equity hedge funds, a poor 2018 caps a disappointing run of performance. The flagship fund at Lansdowne, which runs about $20bn in assets, is its Developed Markets fund, run by Peter Davies — best man at former chancellor George Osborne’s wedding — and Jonathon Regis.

So far this year the fund has lost a net 5.6 per cent, much of which came in October’s market sell-off. Only two years ago it suffered a loss of about 15 per cent, losing money on positions in UK stocks and on bets taken against commodity stocks. It gained almost 10 per cent last year, although fund managers viewed that as a disappointing result, a person familiar with the matter said.

“Returns are clearly disappointing,” the managers wrote in a letter to clients last month, reviewed by the Financial Times, referring to a small loss suffered in the first nine months. “There is no doubt our level of frustration is probably as high as we can recall.

“To some degree this frustration is undoubtedly amplified by the proximity of the period to our UK-induced problems in 2016.”

Messrs Davies and Regis’s approach is to do fundamental analysis and take large, long-term positions in stocks. That, though, can leave you exposed in the shorter-term. Lloyds Banking Group, for instance, a long-term holding that the managers think will benefit as it increases payouts to shareholders, is down by about 17 per cent this year.

The Lansdowne Princay fund, a smaller fund launched in recent years as a vehicle for former BlueCrest fund manager Samuel Joab, has fared even worse, falling a net 10.4 per cent this year.

Lansdowne declined to comment.

Marshall Wace

Mandatory Credit: Photo by Richard Young/REX/Shutterstock (5225618m) Ian Wace and Saffron Aldridge Sexy Fish Restaurant VIP launch party, London, Britain - 08 Oct 2015
Ian Wace, co-founder and chief executive of Marshall Wace

This year was neither stellar nor catastrophic for Marshall Wace, one of the UK’s biggest hedge funds, with the performance of the $39bn group broadly flat.

The flagship $17bn fund MW Eureka, which is overseen by co-founder and chief investment officer Paul Marshall, is up 1.7 per cent in the year to date although it was down 3.9 per cent net in October. MW Eureka allocates to both Tops, the systematic strategy that uses algorithms to trade on investment bank recommendations, as well as fundamental strategies.

Its best-performing strategy was the $1.3bn fundamental Japan Market Neutral equity long-short strategy, which was up 8.3 per cent net in the ten months to the end of October, according to a person who had seen the numbers.

This strategy is run by Rod Rehnborg, a Hong Kong-based manager who has penned a guide on the basics of investing for Goop, the lifestyle shopping site founded by Gwyneth Paltrow. “There are no easy answers, although a mix of stocks, hedge funds and vegetable gardens seems sensible to me,” he wrote.

Marshall Wace declined to comment.

The group, which employs 260 people, has been investing heavily in data science. It is chaired by Brexit-supporting Mr Marshall although Ian Wace, its co-founder and chief executive, wanted the UK to remain in the EU. It recently bulked up its operations in Dublin ahead of the UK‘s departure and in June established a presence in mainland China by setting up a wholly foreign-owned enterprise, a structure that allows companies to establish operations there without having to be the minority partner in a locally controlled joint venture.

Winton

David Harding, founder and chief executive of Winton
David Harding, founder and chief executive of Winton © Bloomberg

Like other computer-driven trend-following specialists, Winton suffered in February and October.

The $26.9bn group is one of the largest quantitative investing firms in the world. Its main fund, the Winton Fund, was down 0.45 per cent net on the year at the end of October.

Founder and chief executive David Harding said the group had a “couple of painfully bad days” in February when trend-following approaches suffered amid a lurch in the markets. Winton has been reducing the weight of trend-following approaches in its funds and is aiming to complete this process by the beginning of 2019.

The group is looking to grow in China where it has received approval to register with the Asset Management Association of China as a private securities investment fund manager. Its China strategy was up a net 6.3 per cent at the end of October.

The group is also branching out into the provision of data analytics services to tap growing investor demand for tools to analyse unstructured data. Earlier this year it spun off Hivemind, its big data analytics unit, which began offering services to external clients in 2017. Winton retains a majority stake in the business.

Europe’s best performing large hedge funds
Net returns, funds of $1bn+
Returns (%)
Name of fundFund managerFund size* ($bn)YTD 201820172016
H2O Multibonds - HUSD-I CH2O Asset Management3.3125.815.1813.14
H2O Allegro - I-C (EUR)H2O Asset Management1.6621.7319.678.45
US Extended Alpha - Class I - Acc EURArtemis Investment Management2.1014.668.87-
Bodenholm TwoBrummer & Partners1.0513.21121.17
Bodenholm OneBrummer & Partners1.0511.7514.830.36
Brevan Howard Macro Fund - USD Share ClassBrevan Howard Capital Management3.3611.72-0.36.62
Ardevora Global Equity Fund - Class A (acc)Ardevora Asset Management1.0111.6216.4121.72
The Children’s Investment Master Fund - Class H - USDThe Children’s Investment Fund Management19.7810.4928.1712.97
Schroder GAIA Egerton Equity - Class I - USD (Hedged) AccumulationSchroders1.419.8222.29-2.14
Schroder GAIA Two Sigma Diversified - Class USD I AccSchroders1.719.639.85-
H2O MultiStrategies - HSGD-R CH2O Asset Management1.629.4819-
H2O Adagio - HGBP-I CH2O Asset Management6.627.686.283.71
Pictet Total Return - Agora - HI USDPictet Asset Management1.647.68--
H2O Moderato - HUSD R-CH2O Asset Management2.176.9210.875.37
* At dates ranging from June to Oct
Source: Preqin

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