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Here’s How Hedge Funds Fared in January’s Trading Frenzy

The wild rise of GameStop and other highly shorted stocks resulted in big winners — and losers.

In a volatile month dominated by a Reddit-fueled trading surge, hedge funds still managed to beat the overall market, according to data tracker HFR.

The research firm’s fund-weighted index of hedge funds rose 0.92 percent in January, outperforming the Standard & Poor’s 500 stock index, which fell 1.11 percent.

Within its hedge fund index, however, HFR recorded a wide range of performance outcomes as retail investors posting on Reddit forum WallStreetBets encouraged short squeezes in stocks such as GameStop and AMC Entertainment. Some posts specifically targeted hedge funds such as Melvin Capital, which lost 53 percent in January, according to the Wall Street Journal.

According to HFR, the worst-performing hedge funds, or bottom decile, lost 7.8 percent over the course of the month. But there were also big winners, with the top decile gaining 11.6 percent in January, HFR said.

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“While significant financial market attention has been focused on a handful of funds and small number of equities impacted by these recent trading trends, the overall hedge fund industry is comprised of over 9,100 funds managing nearly $3.6 trillion across a highly diverse range of strategies, which include significant capital exposure to out of favor, deep value equites,” HFR president Kenneth Heinz said in a statement.

For example, Heinz pointed to event-driven hedge funds as having strategies that “categorically focus on inexpensive, out of favor equities that are experiencing fundamental, structural transition in the underlying businesses.” These hedge funds were the best-performing in January, with HFR’s event-driven index gaining 2.81 percent.

Other high performers included relative-value hedge funds, which focus largely on fixed income. HFR said its relative-value index rose 1.3 percent in January, with the best returns recorded in asset-backed and convertible arbitrage strategies.

Equity hedge funds, meanwhile, delivered mixed results amid the volatile stock trading. While the overall sector climbed 0.78 percent in January, several strategies lost money, including equity market neutral funds and technology-focused hedge funds. At the same time, fundamental growth hedge funds gained 2.26, and hedge funds focused on energy and basic materials stocks climbed 4.83 percent.

“Hedge funds effectively navigated the idiosyncratic stock trading volatility, which focused on deep value equities with high short interest,” Heinz said. “While certain sub-strategies declined in January, as is evidenced by the wide dispersion in performance, as a direct result of the size, breadth, and diverse nature of hedge fund strategies, overall industry performance was positive for the month.”

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