2021 Review – Preliminary Hedge Fund performance

With the US equity market up close to 30%, it is hard to argue that a lot of hedge funds managed to outshine the most common yardstick for alternative costs.

However, in an interesting year for a lot of liquid strategies, we would like to highlight a few positive developments where most Hedge Fund strategies managed to deliver positive returns. Based on our initial assessment the average alternative strategy returned some 7% for 2021. This is based on some 1600 funds that have reported returns for the full year.

Crypto Managers lead the pack with yet another year of more than doubling their capital, while Event-Driven, Fixed Income, and unclassified Hedge Fund Strategies were at the bottom. For more traditional strategies, Equity L/S strategies provided the highest returns. The above is on an aggregate level and dispersion was large.

2021 was a year filled with interesting market developments, here are a few of them:

  • The year started with a massive disruption to the supply chain; overhanging demand from Covid constrained sectors created strong price momentum (commodities, lumber early on, and thereafter pretty much any commodity used for consumption, disruption to the semiconductor supply also played into this as well as the closure of the Suez Canal). This created trends in a lot of markets that CTAs were able to exploit and profit from.
  • The transitory narrative gradually turned into a “transitory for longer” narrative as inflation reared its ugly head. This forced a change in policy for the FED resulting in difficult markets to navigate for some large macro shops.
  • Private equity continued to enjoy strong returns, although in some cases the valuation can be questioned. A 100+ mn sandwich shop in New Jersey, raised a few eyebrows.
  • Listed stocks also provided plenty of action with GameStop and AMC offering a face off between the common crowd against professional traders forcing several large managers to buy back shorts and locking in losses
  • In China, Evergrande finally defaulted, but the global impact was muted.
  • Increased global tension (Russia/Ukraine, China/Taiwan), event that may become significant but which the market largely chosed to ignore.
  • NFTs – The year when significant interest was focused on digital art
  • Crypto assets – While bitcoin remains dominant, much of the action took place in Etherium and other smaller coins.

Based on a smaller list of managers that have elected to report numbers early, we observe that markets were strong and were rife with opportunities, but that the average hedge funds/liquid alternatives delivered much less than the US equity market.

Bloomberg recently published a list for the largest hedge funds, highlighting the strong performance of equity long/short strategies (long biased but nevertheless) and of the rather meager performance for large macro funds. As a database focusing on generally smaller and more transparent managers, we note that most strategies delivered positive returns, but nowhere close to equity markets.

Some of the managers, including Bridgewater, made good money in December.

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CTAs, and especially trend-following managers with a tilt towards commodity markets had a good start to the year, exploiting momentum across capacity-constrained commodity markets. In the second half of the year, the dispersion was higher and the average result was flatter.

While much attention has been given to Systematic managers, we also note that Discretionary CTAs have continued to deliver competitive and smooth returns, as a group. This observation overlaps with a strong performance from pure Commodity Managers where those managers are having the second year of exceptionally strong performance. Diversification and market opportunities managed to create benign conditions for those managers.

Equity Long/Short strategies benefitted from higher equity markets and probably outperformed most other hedge fund styles (with the exception of Crypto). While most of it relates to the strong underlying market, a large number of individual equities provided idiosyncratic trading opportunities.

Event-Driven strategies, as indicated by our indices, were mostly like one of the more disappointing strategies during the year. As a strategy the is long equity type of risk, it was a year where a few large deals broke (e.g. Aon / Willis) and SPAC arbitrage failed to deliver strong opportunities.

After a number of years suffering from poor returns from factor-driven exposure, systematic equity market neutral strategies had a strong year, almost recovering the prior drawdowns.

The Value factor continued to recover the large drawdown that started a few years ago. This helped to lift the strategy to one of the better in recent years.

As per the two last years, Crypto managers provided eye-watering returns and while the year ended on a downtick, the returns from managers having a length in digital assets were significant.

Returns from a naive composition of smaller strategies handsomely outperformed BTC, but the ride was far from smooth.

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