Political uncertainty in Ukraine, Japanese currency fluctuations and steep falls in the two major growth engines in US stock prices have caused hedge funds to come out of the gate on the first quarter of 2014 with their worst start since the 2008-2009 global financial crisis.
Reversing a trend where hedge funds had coasted through 2013 with nearly uninterrupted gains, the average hedge fund gained 1.23 per cent, per data from Preqin. This modest rate of return is the lowest for the first quarter of a year in the last seven years. While it’s low, it’s still a continuation of positive returns on hedge funds over the last six quarters, though there were sectors that over and under performed in that span, most notably ones heavily invested in technology and biotech. Fund managers focused on equity also had a rough first quarter, as corrections propagated through the market.
Notable losers in the new technology sector were Coatue Management, headed by Philippe Laffont. This relatively new, and aggressive, fund returned $2 billion of its original $7 billion stake to investors after losses of 8.7 per cent over the first quarter, vice the US based Standard & Poor’s 500 having risen by 1 per cent in the same time frame. John Paulson’s Advantage Plus fund, valued at $2.8 billion, lost values of 7.4 per cent in March alone, while UK-based Lansdowne Partners, valued at $1.6 billion, underperformed in March, but is still positive for the year.
The causes cited for the change in direction for several of these funds is an over-reliance on momentum, according to one investor with billions in holdings in several hedge funds. Momentum-trading may simply be a trend that’s played out a bit past current market conditions, and other favorite trading strategies are also in need of adjustments in the first quarter of the financial year. Some under-performing notable strategies include large bets on Abenomics, the government adjustment of the Japanese economy proposed by Shinzo Abe, as well as high handed and large bets by macro-fund holders, targeting currencies, interest rates and commodities. Macro-fund traders have lost 1.1 per cent in the first quarter, per data from HFR. HFR’s data leads many analysts to claim that it’s the intersection of a bet on a weaker Yen-to-US Dollar exchange rate, While this strategy worked well in 2013, it’s not working well in 2014. Predictably, the strengthening Yen has caused predicted rises in the Nikkei average to falter, with the Japanese stock exchange taking losses of around 10 per cent on the year so far.
Not all investment strategies have struggled so far; more conservative strategies have prospered, as have strategies aiming at a social or activist approach. So-called “activist funds,” which pressure the companies they hold shares in to change policies, or resource extraction aims to be more socially sound or environmentally sound, have prospered, with strong growth of around 2.1 per cent for March alone, and over 3.3 per cent for the first quarter of 2014. Making the most of 2014 hedge fund returns remains an interesting challenge; the mini-recovery of late 2012-2013 may be slowing down, at least in the tech sectors, and bets on an export-driven continuation seem to be cooling off.