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Rupert Hargreaves
Rupert Hargreaves
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Learning From Hedge Fund Performance in 2018

It looks as if the industry suffered significantly last year

January 09, 2019 | About:

Hedge fund performance figures for 2018 have already started to trickle out, and it looks as if the industry suffered significantly last year. Some figures suggest that the hedge fund industry experienced its worst performance in 2018 for 10 years, the financial crisis is the only period in recent history where funds have suffered more.

Here is a look at some of the worst performers last year, why they underperformed the market so significantly and what the future holds for these former illustrious hedge funds.

Fall from grace

Of all the hedge funds in the $3 trillion industry, David Einhorn (Trades, Portfolio)'s Greenlight Capital had the worst 2018. His performance is particularly shocking because of his record of beating the market.

Before 2018, the seasoned hedge fund manager had chalked up returns in the mid to high double-digit rate per annum since inception. However, in 2018, initial figures suggest that his hedge fund, Greenlight Capital, lost 34% in 2018, a disastrous year and its worst in the 22-year history of the fund -- that's including the dot-com boom and bust, as well as the financial crisis.

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But why has this fund manager come unstuck? Greenlight's most significant holdings include General Motors (GM, insurer Brighthouse Financial (NASDAQ:BHF) and homebuilder Green Brick Partners. These are all concentrated positions, and bets on what Einhorn believes to be significantly undervalued companies. However, they all lost value in 2019, bleeding as much as 47% excluding dividends.

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Einhorn's performance is notably bad, but other fund managers have not performed much better. Dan Loeb's Third Point lost 11% in 2018, and Bill Ackman (Trades, Portfolio)'s Pershing Square had another mediocre year. At one point in the year, the fund was up nearly 20% but ended the year flat.

These big-name funds might have lost money, but the rest of the industry is a mixed bag. Some smaller and more agile funds, in particular, the $53 million Crescat Capital fund, climbed 40.5% in its global macro hedge fund and 32% in its long-short hedge fund according to data supplied by Bloomberg. Crispin Odey, who has lost money consistently for four years, produced some of the best returns in the industry in 2018 with a total gain of 53%. The biggest hedge fund in the world, Bridgwater, reportedly gained just under 15% in its Pure Alpha strategy.

Volatile year

What is interesting about these numbers is that 2018 was supposed to be the year hedge funds made a comeback as volatility returned.

As it turns out, it looks as if many funds were unprepared for the volatility and had too much invested in single positions. Looking through the initial performance figures, there is a clear trend in hedge fund performance.

Macro hedge funds have outperformed the pack, and so did smaller firms with a concentrated focus on themes such as small-cap stocks, distressed credit or merger arbitrage. I should point out that at this point, these are only initial speculations as we do not have all of the numbers available to us yet, but the data still provides food for thought.

I think one of the main takeaways is the fact that having a highly concentrated portfolio is probably not the best approach because those firms that do, notably Third Point, Greenlight and Pershing Square, lost a lot of money last year. Firms like Bridgewater, Renaissance Capital and Odey manage more diversified books (although they also use a lot of leverage).

These are only initial takeaways, and I'm interested to see how the market works in 2019 and if these hedge funds can make a comeback.

Concentration isn't always bad but it does come with extreme volatility, and most investors cannot deal with this level of volatility. Something to consider for 2019.

Disclosure: The author owns no share mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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