When reports of a new, highly contagious virus spreading throughout Wuhan, China began to surface in mid-January, few seemed to grasp the enormity of the threat. To many, it seemed confined to some unheard-of province in the middle of the country.
By late January, the virus had started to overwhelm parts of Italy, and clearly alarmed health experts began calling for Americans to be tested and take other precautions. Still, it wasn’t until mid-March that the Western world began to take the threat seriously. On March 11 the World Health Organization declared Covid-19, the illness caused by the novel coronavirus, a pandemic, and more state governments in the U.S. began issuing lockdowns. By that time, the stock market had been in freefall for several weeks, ultimately entering bear-market territory.
But a little-known New York-based macro hedge fund had begun sounding the alarm months before — and apparently took steps to exploit the financial markets’ reactions. In a letter sent to clients in late January, the fund’s manager, Haidar Capital Management, acknowledged that investors were having difficulty dismissing a potential pandemic. By late February, Haidar was already convinced the spread of Covid-19 would eventually develop into a global pandemic that would rock the business and financial communities, and eventually Main Street.
“Economic activity is likely to suffer further, as countries around the world implement containment measures and fear weighs on consumer spending,” the firm stated in a letter sent to clients that month.
That prescience paid off bigtime: While many investors were freaking out as the markets collapsed in March, Haidar posted a 25.26 percent gain in its flagship Haidar Jupiter fund that month. After tacking on further gains in April, Haidar Jupiter is now up a blistering 59-plus percent for the year.
Such gains may not be too surprising to those who have followed the fund since its 1999 launch. The fund has posted double-digit returns in three of the past four years — a period when most of the largest macro funds were mostly posting small single-digit gains or losses — and double-digit gains in ten of the most recent 14 years.
Altogether the fund, which managed $548 million at the end of 2019, has generated an astounding 4,000 percent total gain since its inception through March, according to a Haidar document. This compares with just a 182 percent total return for the Standard & Poor’s 500 stock index and an 87 percent gain for the HFR Macro Index during the same period.
But it hasn’t generated these eye-popping returns just from savvy timing. Regulatory documents show the fund uses heavy amounts of leverage, or borrowed money to juice returns.
In a regulatory filing, Haidar reported $18.5 billion in regulatory assets, or nearly 34 times the Haidar Jupiter fund’s reported assets as of the end of 2019. Regulatory assets include all debt and borrowed money.
While such a high degree of leverage has provided a shot of adrenaline to the fund’s returns in recent years, it could produce devastating losses if the firm made the wrong calls.
“They are volatile and the only way to make those returns is with leverage,” said a Haider investor in an e-mail communication with Institutional Investor.
This investor called the fund’s degree of leverage “surprising,” adding that Haider Jupiter has perhaps been lucky so far. If any other fund used this much and got caught out on wrong-way bets, “it would typically kill them before this point.”
The firm was founded by Said Haidar in 1997. Haidar earned bachelor’s and master’s degrees in economics from Harvard University and came close to completing a Ph.D. in economics at the University of Chicago, but never finished his dissertation.
His first two jobs were at investment banks that subsequently wound up folding: Drexel Burnham Lambert, where he eventually served as director of quantitative research in the institutional futures and options division, and Lehman Brothers, where he was a senior vice president and director of the quantitative strategies group, responsible for quantitative research modeling. He finished out his investment banking career at Credit Suisse First Boston, working as head of research for fixed income proprietary trading before striking out on his own.
The Haidar Jupiter Fund trades a wide range of assets, including equities, currencies and fixed income. And the firm has acknowledged in its regulatory filings that it will at times use a “substantial” amount of leverage. This has seemingly worked to the fund’s advantage in recent years — and it played out especially well in 2020, as the firm correctly assessed the pandemic threat. In January, the Haidar Jupiter fund surged more than 14 percent.
The coronavirus was not the only major news event in what proved to be a volatile month. The Trump administration ordered the killing of the commander of Iran’s Quds Force, raising concerns about further military escalations and rising oil prices. Meanwhile, the U.S. and China signed their phase-one trade deal, and that, coupled with the passage of the USMCA, helped to propel the stock market.
But the threat of the coronavirus loomed large in January, with new Covid-19 cases confirmed in the U.S. In January global bond markets rallied along with other safe haven assets, as 10-year Treasury yields fell more than 40 basis points, or 0.4 percent.
Not surprisingly, Haidar said in its letter to clients that bond market trading accounted for the majority of the fund’s monthly gain in January. And as geopolitical risks and pandemic fears sparked a global bond market rally, the fund added to its long positions in longer-dated paper. Haidar also reaped gains from long positions in precious metals and shorts in base metals. Those profits were more than offset by the sharp reversal in crude oil prices as they suddenly started to plummet. As a result, Haidar said it lost money from commodity trading.
Haidar, though, was already gearing up for the coronavirus threat.
“The spread of Covid-19 has increased rapidly in recent days, leading to expectations that this will eventually develop into a global pandemic,” Haidar correctly predicted in the January letter.
Haidar went on to gain another 7.4 percent in February, a month that started off strongly for stocks but ended badly as investors finally realized they were facing a potential pandemic and global shutdown.
As stocks started to slump, panicky investors piled into U.S. Treasuries, deemed to be a safe haven, knocking down yields to nearly unforeseen levels. Haidar was positioned for this, loading up on later-maturing bonds, which rose more in price than short-term paper.
Haidar also made money from short positions in energy and base metals, as well as shorting the currencies of countries that heavily rely on the commodities markets against what it deemed to be “safe haven currencies.”
“With much of the United States and Europe now on lockdown and healthcare systems globally overwhelmed by the exponential spread of Covid-19, we anticipate a very sharp contraction in world growth,” Haidar predicted in a letter sent to clients in March. “Initial supply-chain disruptions that started to spook markets in January and February have now given way to entire industries in crisis and entire nations under quarantine.”
And Haidar was not hopeful that the dire situation would change anytime soon. “We do not foresee a significant stabilization in risk assets until the rate of global transmission slows,” Haidar warned clients in the letter.
This set up Haidar for its explosive March, when it surged more than 25 percent — its largest monthly gain ever — as the U.S. finally locked down and Trump grudgingly acknowledged the health crisis.
Haidar attributed the stock market rebound in March to “investor optimism about a speedy return to normal economic activity” — a view it did not share. Rather, Haidar warned clients that “any rapid reopening of economies globally will ultimately be counterproductive and will likely lead to a large resurgence of infections.”
The firm also expressed concern that loan defaults and bankruptcies were only just beginning to emerge and predicted earnings estimates will likely need to be revised downward even more. (Clearly there was no mistaking Said Haidar for Larry Kudlow.)
The Haidar Jupiter fund’s April gains were far more muted, with the fund returning 6 percent in a month that proved to be the stock market’s best since 1987.
Now, Haidar must deal with its own challenges: building on its current gains, or at least holding onto them, while continuing to correctly assess Covid-19’s path. If it is successful, the firm could post its best year ever. And if not, the firm’s ample leverage could well make 2020 its worst.
