The Great Contraction: Hedge Funds Brace for More Pain
After a tough 2015 that saw fund closures at firms such as Fortress and Avenue Capital, managers can expect performance woes to continue.
Many hedge fund managers are happy to see 2015 receding in the rearview mirror. Almost nothing worked. Yet for some managers, 2016 isn’t likely to offer much of a reprieve, with problems having persisted into the new year.
The HFRI Fund Weighted Composite Index finished 2015 down 1.02 percent, and all of the major subcategories — equity hedge, relative value, event-driven, macro and funds of funds — ended up in the red. Among the biggest hedge fund losers in 2015 tracked by HSBC Holdings were such high-profile firms as David Einhorn’s Greenlight Capital and William Ackman’s Pershing Square Capital Management, both based in New York. Ackman told investors that 2015 was on track to be his firm’s worst year, eclipsing even 2008. The $4.8 billion Pershing Square International fund ended the year down 16.54 percent and continued to sustain losses into January.
Though activists like Ackman and Einhorn have taken some knocks, a situation exacerbated by troubles in some of their choice holdings, macro and distressed-credit funds are really feeling the pain. The collapse of global commodities prices — oil in particular, with the resulting problems for oil and gas companies, among the largest issuers of high-yield debt in recent years — along with the U.S. Federal Reserve Board’s decision to finally end its policy of record-low interest rates have been bad news for both strategies.
Some of the best-known macro managers have closed their doors. In October alternative-investment firm Fortress Investment Group announced that Michael Novogratz, head of its liquid products group and a prominent macro name, was retiring from the New York–based firm and that it would shutter his $1.6 billion Fortress Drawbridge Macro fund. Novogratz, previously a partner with Goldman Sachs Group, had been especially hard-hit by his bullish bets on Brazil. Drawbridge Macro, which had a record of up and down performance, also lost money on the Swiss franc at the start of 2015.
On December 1, BlueCrest Capital Management, the Guernsey, Channel Islands–based macro and multistrategy credit fund headed by Michael Platt, said it would return money to outside investors and become a family office. BlueCrest was one of the few hedge fund firms to do well during the market meltdown of 2008; thanks to that and subsequent good performance, it had seen inflows of investor capital. At its height BlueCrest managed $37 billion, but redemptions and poor results in recent years, as well as the spin-out of core teams, including its $8.3 billion BlueTrend funds to form Leda Braga’s Systematica Investments, reduced that total to roughly $8 billion.
In November, alternative-investment manager and Hillary Clinton backer Marc Lasry revealed that he would close his original distressed-credit hedge fund, Avenue Investments, and return money to investors. That move leaves Lasry’s $13 billion, New York–headquartered Avenue Capital Group with only private equity–like fund structures that have longer lockups and a different fee structure from hedge funds, which are typically best suited to more-liquid strategies. The Mudrick Distressed Opportunity Fund, a vehicle managed by New York–based Jason Mudrick that may be comparable to Avenue Capital in strategy, ended 2015 among the worst performers in the HSBC fund universe, down 26.32 percent.
The whole industry seems to be in retreat. Michael Rosen, principal and CIO of Angeles Investment Advisors, a $27 billion advisory firm based in Santa Monica, California, agrees that times have been challenging of late for hedge funds. “It’s like the Hunger Games,” Rosen says. “And we’re all looking for Jennifer Lawrence.” When it comes to macro and distressed debt, “global macro is a really tough place to make money constantly,” he adds.
The high-yield market in general has been rocked, but the extent of that stress became apparent in December, when mutual fund firm Third Avenue Management announced that it was closing its $798 million Focused Credit Fund. Highlighting the problem of liquidity in the high-yield and other credit markets, New York–based Third Avenue said it would not immediately return capital to investors but unwind positions over time.
Hedge fund managers and other participants have been raising concerns about the liquidity of the credit markets since 2010. Now, with banks cutting their fixed-income trading groups even further, those worries look prescient. •
Follow Imogen Rose Smith on Twitter at @imogennyc.