In the investing world, 2011 can be rightly marked as one of the black periods in investing history. It was the time when every major economy of the world had something to lament about, the most significant contributor to the slowdown being the spiralling debt crisis of Europe that gave value investors a run for their money. Stock markets stopped responding to actual stimulus and turned into a stage for European politicians.
On top of that, the Wahabi Spring, Japan’s tsunami, China’s housing collapse, US debt downgrade, all piled up on one another and created a suffocating environment for investors. Markets became volatile and ignored fundamentals, and this made value based investments, that are supposed to be unique and unconventional, not only harder to spot, but the chances of them springing back increased manifold.
Last year the HFRI Fund Weighted Composite Index declined by 4.8% in 2011, which is its second worst performance in history, the first being a dive of 19 percent in 2008’s financial crisis. At the same time, the S&P500 (INDEXSP:.INX) ended flat last year. The correlation between the two indexes remained at its highest, at 98 percent in 2011. What such a high correlation basically translates to is that both markets are converging on the performance of conventional assets. Value investors though can now make more money, because they invest based on fundamentals (as opposed to quant, marco etc funds).
The HFRI Fund Weighted Composite Index has gained 4.33 percent year to date, as of the end of October. The S&P500 (INDEXSP:.INX) was up 12 percent during the same period. According to BAML, the correlation between the two indexes is still high at 82 percent, but at least lower than last year’s almost completely coordinated movement. If we compare the performance of a few well known value oriented hedge funds through the current and previous year, the improvement in returns is easily visible. The S&P 500 was flat in 2011 while it is up close to 10% this year, but there is more at play (additionally, the Dow return currently is nearly identical to its 2011 return).
Famous value investors like David Einhorn and Bruce Berkowitz posted huge losses in the last fiscal year. Berkowitz’s Fairholme was hammered in 2011, when assets under management declined by 70 percent and the returns for the year were down by 32 percent. All of Fairholme’s investments were concentrated in financials and they did not perform as they were expected to. For this year, the performance is estimated to be up by 32 percent so far.
David Einhorn of Greenlight Capital struggled through the first three quarters of 2011 and ended the year by posting on average, +2 percent gain on all his funds. Einhorn pointed out the same reasons for a difficult year as did every other investor. But performance has improved visibly going forward. For the three quarters of 2012, Greenlight’s funds reported a gain of 13.2 percent. Its reinsurance company, Greenlight Capital Re, Ltd. (NASDAQ:GLRE), was up 12 percent at the end of Q3, which is also a major leap from the aggregate gain of just over 4 percent for 2011.
Third Point LLP, another value oriented, event driven hedge fund was flat in 2011, but recovered in this year. Third Point’s assets are now ranging near $10 billion with a year to date return of 13.8 percent. According to Third Point’s latest letter, the year to date return in 2012 has been 13.8%.
Another renowned value investor, Bill Ackman had a rough 2011. The returns were down over 15 percent in the first three quarters of 2011 on all of its funds. Pershing Square’s funds posted some serious gains in the last quarter of 2011, which helped the year’s total returns and the fund managed to report performance between -2 to -1 percent. For 2012, the fund was up 3.3 percent at the end of Q2 2012.
The correlation of hedge fund returns with the major market movers is still much higher than the average and their performance is lagging compared to the S&P 500 index. But these investors have regained some lost ground and have become cautious. We are waiting to see how this year ends for the value investing community.