2018 was a pretty miserable year for the hedge fund industry. According to data supplied by eVestment, hedge funds ended 2018 in the red with an average performance of -4.86%.
This was a sharp turnaround from 2017, when the hedge fund industry produced the best performance since 2013, with an aggregate gain of 8.9%, following a positive return of 5.4% in 2016.
Following the dismal end to 2018, when markets around the world collapsed, hedge funds rebounded strongly during the first quarter of 2019. Data show that hedge funds added 5.7% on average during the first quarter of 2019, the best start to a year since 2006.
Some hedge funds have chalked up a much better performance than others. For example, Bill Ackman (Trades, Portfolio)'s Pershing Square gained around 40% this year, and leading the pack is Regal Funds Management's Atlantic Absolute Return Fund, which is up a staggering 74% for the year to the end of May.
A blow-out performance
Regal uses a rather aggressive investment strategy. The Atlantic Absolute Return Fund is highly geared and, as a result, is highly volatile. According to its May performance update, the fund's net exposure -- the difference between the value of its bullish and bearish bets -- was 174%. Gross exposure was a staggering 511%.
With such a highly leveraged portfolio, it is no surprise the Absolute Return Fund's returns are so volatile. Last year, when the rest of the hedge fund industry was reporting a high single-digit loss, Regal's flagship fund lost 41%. It gained 72% in 2017, lost 44.5% in 2016 and added 136.8% in 2015.
In other words, this fund is not for the faint-hearted. Still, despite the volatility, since inception back in the first quarter of 2014, the fund has produced an annualized return of 34.5% for investors with a maximum drawdown of nearly 69%.
Stock returns
According to the Sydney Morning Herald, two of the stocks that helped power the Absolute Return Fund to this impressive gain are Fortescue Metals Group (ASX:FMG, Financial) and buy-now, pay-later service Zip Co. (ASX:Z1P, Financial).
Zip Co. has seen its share price charge higher over the past 12 months. The stock is up 287% over the past year as investors have rushed to buy into this growth story. Zip helps consumers pay for large-ticket items with installment plans, and revenues more than doubled between 2017 and 2018. While the company is still loss making, losses are rapidly coming down. Analysts have the company reporting sales of $57.3 million for this year and a net loss of $14.7 million compared to revenues and losses of $39 million and $22.6 million for 2018.
The other company that's been a significant contributor to Regal's returns this year is Fortescue Metals.
One of the largest iron ore producers in Australia, Fortescue's income has received a boost from rising iron ore prices, which are up around 38.1% so far this year. The company lagged the market last year because it produces relatively low-quality ore compared to the rest of the industry. Chinese mills favor higher quality ore over the lower-quality grade because it helps them maximize output and reduce costs.
Higher ore prices have been a boon for Fortescue because operational gearing should help the company dramatically improve profits. Indeed, in the first half of this financial year, the company has already registered a 227% increase in reported net profit after tax and a 230% increase in basic earnings per share.
The dividend for the period was up 150%. If this trend continues throughout the rest of 2019, I do not think it is unreasonable to suggest that the stock price could rise further from current levels.
Disclosure: The author owns no share mentioned.Â
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