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Rupert Hargreaves
Rupert Hargreaves
Articles (856)  | Author's Website |

Hedge Funds Roar Back in 2019 but Stock Pickers Suffer

Preliminary data shows that hedge funds achieved one of the best performances since the financial crisis

July 11, 2019 | About:

After a mixed 2018, it looks as if hedge fund performance is roaring back this year. Preliminary data shows that hedge funds achieved one of the best performances since the financial crisis during the first half of 2019, as equity markets recovered from their year-end 2018 slump.

According to data compiled by hedge fund data provider HFRI, hedge funds are up 7.6% in 2019, making the first half of the year one of the strongest on record for the industry. The HFRI Fund Weighted Composite Index gained 2.6% in June, the most robust performance since January of this year.

Some hedge fund managers have chalked up a much better performance than others. Ken Griffin's $30 billion hedge fund Citadel is up 13.6% for the first six months of 2019. Bill Ackman (Trades, Portfolio) has achieved possibly the best performance and strongest comeback in the entire hedge fund industry.

After several years of turbulence, his fund, Pershing Square Capital Management, was up more than 45% during the first half of 2019. This performance was beaten by the Australian hedge fund Atlantic Absolute Return Fund, which manages just $183 million but managed to achieve a return of 74% during the five months to the end of May.


These performances are impressive, but for the most part, hedge funds are lagging the S&P 500 this year. So far, the S&P 500 index has returned 19% in the first half of 2019. That's compared to 7.6% for the average hedge fund. However, some sectors of the hedge fund industry have chalked up a better average performance. Equity hedge funds added 3.2% on average during June, bringing the year-to-date performance to 9.4% according to data compiled by HFRI.

These returned contrast sharply to the performance figures the hedge fund industry posted last year. Most hedge funds registered a negative return in 2018 as volatility returned in the last few months of the year and wiped out positive gains.

One of the most high-profile losses in 2019 was David Einhorn (Trades, Portfolio)'s Greenlight Capital, which suffered an overall loss of 34%. Meanwhile, Dan Loeb's Third Point fell 11%. But while equity-focused strategies suffered, quant funds pulled ahead. Ray Dalio (Trades, Portfolio)'s Bridgewater, the world's largest hedge fund, posted gains in its flagship Pure Alpha strategy of 14.6% net of fees. Citadel returned a high single-digit percentage, and Renaissance Technologies' RIDGE Fund gained upward of 10%.

Tough market for stock pickers

These figures show just how hard it has been for stock pickers to make money in the current market environment. Even though hedge funds have rebounded in the first half of 2019 from losses suffered last year, if you take the performance figures over the past two years, most funds are still in negative territory or have substantially lagged the S&P 500.

On the other hand, the industry's largest quant funds have pulled ahead, as they've been able to use their financial firepower and reputation to attract the best and brightest in the industry.

Unfortunately, it doesn't look as if this trend is going to end anytime soon. Stock picking is tough, and it isn't going to get any easier as the market continues to reward high growth companies and avoid low growth businesses in old industries.

It is no coincidence that the best performing hedge funds have positions in some of the world's largest and most liquid technology companies. These are the businesses that are attracting most of the capital in the market right now and smaller, undervalued businesses and not attracting the same attention. If the Federal Reserve decides to adopt a more accommodative monetary policy going forward, it is unlikely this theme will change anytime soon.

Disclosure: The author owns no share mentioned.

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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.

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