Hedge Fund: Larger Doesn’t Mean Better

Hedge funds continued to face performance declines for a second consecutive month in October. The tough Q1 of the year and the past two months have left the industry at only +1.20 per cent return year to date (16 Nov 2020). The S&P500 return year to date in contrast is +10.97 per cent.

Source: Hedge Fund Research (as at 16 Nov 2020)

Size matters. Large hedge funds have traditionally been more stable in down markets. But as measured by HFRI’s asset weighted index, large hedge funds showed negative return of -4.34%. The sheer size of some funds makes them harder to react by switching in and out of bets. So, when volatility roiled stocks, bonds, currencies and commodities earlier this year, many giant players lost record sums of money.

According to Nishant Kumar from Bloomberg, not all large hedge funds have disappointed. Multi-strategy firms such as Citadel, Balyasny Asset Management and Millennium Management, which rely on dozens of traders to generate profits, are having one of their best years. Such funds are typically dominated by trading-oriented strategies and volatility tends to create more opportunities for them.

One reason why smaller funds are doing better is that they’re jumping on very niche trading opportunities.

“The irony is that the hedge fund industry was built on investing with small, nimble managers who could exploit esoteric investment opportunities,” said Andrew Beer, founder of New York-based Dynamic Beta investments. “The last several years have shown that sometimes big might be too big, especially when fees consume most performance.”

Stepping into Q4, PivotalPath notes that presidential elections have historically removed uncertainty from the markets, no matter which party wins. Hedge funds’ performance could be better in this quarter as generally, the funds outperform in the three months after an election compared to their performance in the three months before the election. Nonetheless, staying nimble is the way forward.

 

Reference:

1.     Nishant Kumar, Hedge Fund Giants Lose Their Appeal as Havens in Global Turmoil, 26 Oct 2020, Bloomberg

2.     Jacob Wolinsky, Smaller Hedge Funds Are Outpacing Their Larger Rivals, 23 Oct 2020, Forbes

3.     Hedge funds see second consecutive month of average performance decline, 12 Nov 2020, www.hedgeweek.com/