Author — George Trager, Financial Markets Enthusiast, Editor of investbrain.net
Blog — investbrain.net
Article Title: Why Did 2015 Suck For Hedge Funds?
At this point the fact that 2015 was one of the poorest and most challenging years for hedge funds has been discussed ad nauseum. Very large and venerable hedge funds such as Larry Robbins’ Glenview Capital Management, David Einhorn’s Greenlight Capital and Bill Ackman’s Pershing Square each ended 2015 down between 15-20%. But even beyond these few, overall returns for hedge funds were tepid: the Barclay Hedge Fund Index estimated that the 2,000+ hedge funds included in its index returned on average 0.24% in 2015, the lowest returns in 4 years. What caused this? 3 factors in our view
Hedge Fund Idea Concentration
2015 was a year were multiple companies with concentrated hedge fund ownership had sharply weaker performances than the overall market. To illustrate this, the top 10 companies with the highest hedge fund ownership as tracked by Goldman Sachs, returned on average -22% in 2015. Notable underperformers included Cheniere Energy (47% decline) which counts Baupost Group, Icahn Associates, Viking and Lone Pine as top investors, Avis Budget Group (45% decline) which counts Glenview, Fir Tree and Marcato as top investors and Brookdale Senior Living (50% decline) which counts Glenview and Jana Partners as their largest and third largest investor respectively. As discussed previously, the risk of hedge fund idea concentration is violent reactions that occur when something goes wrong, either in the market or in the position itself. Hedge funds tend to drive exaggerated stock moves. 2015 was a year were this phenomenon could be observed again and again.
Concentrated Strategies vs. Diversification
Some stand-out performers in 2015 include Kenneth Griffin’s Citadel which finished 2015 with a 14% return in its largest funds, as was reported by institutional investor’s alpha, Israel Englander’s Millennium Management likely finished 2015 with a net return above 10% given that the New York Times reported that the fund was up 11% through November and Steve Cohen’s Point72 Asset Management was up 15.5% in 2015 as reported by CNBC on Twitter. It isn’t a coincidence that these three behemoths were not only able to avoid losing money last year, but significantly outperformed the broader market. Each of these hedge funds is known for their market neutral or low net approach, portfolio diversification and risk management. This is in contrast to hedge funds who run highly concentrated strategies such as Pershing Square and who suffered from a handful of their positions under performing. Reacting to new information that you know will negatively impact a stock you are long, when you are a top 5 holder of said company becomes almost impossible without adding to the pain.
Un-linearity of Market Performance
Finally, from a technical and somewhat psychological standpoint, the path of market performance played a large role in the difficulty of investing in 2015. Specifically, the majority of the volatility in the markets started later in the year and continued through the end of the year. Investors typically get defensive near the end of the year, lowering their overall exposure. Add some market volatility to that and you very quickly are in a situation highly prone to exaggerated moves, which in turn lead to panic which restarts the cycle.