I had the opportunity to sit down with Eric Uhlfelder, the discuss his latest edition of the Global Investment Report, to discuss his 2024 survey of the Top 50 Hedge Funds. We discuss the most impressive performing managers over the trailing five-year period through 2023 and discuss some of the potential opportunities a nd pitfalls for the remainder of 2024.
Managers that made the list collectively delivered superior risk-adjusted returns compared to the S&P 500, with a Sharpe ratio that was nearly twice that of the market. Eric provided detailed color on several managers, highlighting those that are new to the list and why certain well-known managers fell off the survey.
Hope you enjoy our discussion!
FEATURED WEBINAR: Anna Niziol, former chief marketing officer and head of product development at Rothschild & Co, joined Eric and I as moderators of our recent July 30th hedge fund allocator webinar that addressed navigating turbulence during a time of monetary, geopolitical and market uncertainty. To watch, please click and sign in:
https://streamyard.com/watch/BpUY3JGUDNVW
What were the most important takeaways from this year’s survey?
While the market outperformed the Top 50 by 2 percentage points over the trailing five years, the 50 generated vastly superior risk-adjusted returns. Its Sharpe ratio was 1.43 vs 0.75 for the S&P 500 TR. The average hedge fund Sharpe was just 0.53. And the 50 accomplished this with modest correlation to the market of 0.31 over the past 5 years. I think this is the kind of performance investors seek from alternative investments. And preliminary results suggest this group of funds have continued to thrive during the first half of 2024, but well behind the market.
The three top-performing strategies were equity, macro, and multistrategy, which represented more than half the Top 50.
The average fund age, 15.2 years, was the highest ever registered since I adopted the current format in 2019 for The Wall Street Journal. While the notion of survivor bias has a negative connotation, I reverse this notion by seeing sustainable investment processes that have enabled many managers to thrive for quite some time.
And this was most clearly manifested by the fund that took the top spot in this year’s survey. Roots of Peconic Grenadier (ranked No.1) date back to 1986.
The biggest surprise from this year’s survey was inclusion of six emerging market funds—the most that have ever made the Top 50. Four are credit funds, two of which are profiled in the survey. A common thread: these managers have figured out a way to de-risk exposure in the world’s most volatile asset class.
The survey has always included a number of big-name funds, such as Citadel, DE Shaw, and Millennium. Now I see Greenlight Capital, AQR, Point72, Marshall Wace and GoldenTree.
Why did these large funds suddenly make the cut?
That’s simple. They previously hadn’t qualified because their performance in 2018 lagged. That was a tough year for many managers, and this year’s survey was the first time that the trailing 5-year performance period (which is a key determinant of ranking) no longer included 2018. I apply hurdles, as Warren Buffett famously put it, to see who’s swimming with trunks as the tide went out.
I also see an even longer list of familiar names having lost their place in the survey, including Schonfeld, Tudor, John Street, Haidar-Jupiter, and Segantii.
What happened?
That’s also simple: they all failed to meet the 2023 hurdle rate of 5.75%.
Doing so doesn’t mean a fund has suddenly lost its appeal. A manager can have an off year. But to make this survey reflective of the most consistently performing funds, I need each constituent fund to sustain a minimum level of absolute performance regardless of what the market is doing.
That said, the two Schonfeld funds that got knocked off the list (Fundamental Equity and Strategic Partners) have already generated double-digit returns so far this year through June.
But I’ve found that significant underperformance can reveal underlying problems. This was most evident with Haidar Jupiter. Even when it claimed the top spot last year, the high-octane manner in which Said Haidar had been managing the fund involved significant risk taking. He lost a lot of money in the fourth quarter of 2022 and then got clobbered in 2023.
Segantii Asia-Pacific Equity Multistrategy told a different kind of story.
The fund has always been a consistent performer. But I became concerned by its rapid asset growth which can make it harder to sustain returns. AUM had doubled between 2018 through 2021, when that number exceeded $6 billion. I don’t know if that may have been behind the Singaporean regulators claim of insider trading. Until proven in court, we don’t even know if the charges are even true. But what we do know is that these accusations led key service providers to reduce support for the fund, and that the fund has since decided to shut down after nearly 18 years in business.
Between the new additions and the loss of well-established names, your Top 50 sounds like it’s more dynamic and maybe less consistent group than usual?
Many of the previous Top 50 funds did well last year. That percent didn’t change. But a few didn’t retain their rankings because the minimum 5-year annualized return threshold increased by two full percentage points. Normally two-thirds of the funds qualify for the following year. That percent declined this year to about one half because of an influx of funds that now qualified for inclusion. Some were well-established funds that were no longer held back by their performance in 2018; others were funds whose data was only made known to me this year.
Does it surprise that EM funds represent more than 10% of the Top 50? How do you explain their consistent performance?
Yes, and I was especially surprised how many were in the credit space. With the Fed having sent interest rates soaring across 2022 and into 2023, I thought such volatility would cause all sorts of problems across emerging markets. In Africa, we witnessed local currencies crash. But the African Debt Fund not only eked out a profit in 2022, it thrived in 2023. The reason: it controlled risk and exploited financing opportunities that resulted from shifting interest and exchange rates. A number of EM credit funds that have much broader geographic exposure were able to achieve the same results through different means, including relative value and directional trades.
Well-known multi-billion-dollar managers normally don’t give interviews? How did you get Jason Mudrick (Mudrick Distressed) to agree to a profile?
Good question. I can’t answer the question directly. So I’ll guess.
First, I’m honored that Jason granted the interview. His fund has been around for more than 14 years, and he’s a highly regarded manager. He said he has given only one interview and that was soon after the fund launched.
Jason’s fund has made the survey over the past six years since I started the current ranking process. That means he has delivered hurdle-beating returns for a full decade.
I’ve known Jason for years. He has always been reticent to speak about his fund. I didn’t ask him why this year he decided to open up. Maybe he appreciated my reporting approach that’s focused on objective long-term performance review rather than near-term hype which is the fodder that often gets published.
He had a rough start to this year, in large part due to an acquirer of one of the fund’s significant positions who decided not to honor the warrants with which Mudrick had been compensated. I’m guessing that loss was written down. The issue is currently being litigated. I don’t imagine for a second that he needed a profile to counter this event. He has done just fine without coverage, and his fund has since rallied.
Do you think your segment of the industry is well poised for the rest of the year?
Yes, and toward the end of this year’s survey, I concluded that despite a myriad of risks, including richly-valued stocks, market strategist capitulation claiming stocks are poised to continue their run (which always makes me nervous when there’s such broad consensus), and a slew of geopolitical risks that appear to be getting worse, including two wars and the specter of Trump returning to 1600 Pennsylvania Avenue), I wrote the second half of 2024 appeared safe for risk assets.
With inflation steadily declining close to target levels, the Fed may be ready to start cutting rates as soon as September. Frankly, I like having 5% interest rates. It’s a real risk premium that forces investors to be more critical about investments. If the Fed starts to cut rates, then fixed-income will certainly be an even more desirable place to be. And stocks may benefit so long as there’s not a material slowdown in growth.
It’s too early to report on the performance of the Top 50 through June. But with about half the funds reporting, the average return is about 6.5%. That’s slightly more than a full percentage point better than the BarclayHedge Hedge Fund Index is reporting so far with returns of about 1,900 funds.
BarclayHedge reports emerging market global equities as the second best performing broad strategy during the first half of 2024, up 8.8%, followed by equity market neutral, which had appreciated by 7.4%. No surprise that equity long bias led the way, rising 9.6%.
What are other sources indicating?
Economist Ed Yardeni sees stability of second quarter S&P 500 earnings estimates as a positive surprise. He reports that there’s a typical decline of about 4% from the beginning of a quarter through the end of quarter before companies start reporting.
Caron Bastianpillai, who helps allocate capital into hedge funds at Swiss-based NS Partners, describes 2024 as “a good vintage for hedge funds overall across all hedge fund strategies, except for risk arbitrage and macro relative value.”
And Bloomberg recently reported that, “The biggest hedge funds are off to one of their best starts to a year, aided by stocks and quantitative investing.”
Large funds in the Top 50 are generally doing well. Citadel Wellington, Point72, Greenlight Capital, and Millennium, D.E. Shaw Composite are up an average of 7.7. And bucking the troubles many macro managers are having, DE Shaw Oculus and AQR Helix have registered double-digit gains.
Could something throw water on the party?
Absolutely. There are two hot wars going on that could morph into larger conflicts affecting commodities and supply chains. The US election circus is hard to handicap and will bring greater uncertainty if Trump is re-elected—something for which markets are not prepared.
But most investors appear to be excessively focused on interest rates. They’ve already started heading lower in Europe, and if the Fed follows than that may be the clearest indicator for what lays ahead short term for markets and hedge fund managers.
Thanks Eric, it’s been a pleasure. I’m looking forward to the upcoming webinar. Eric’s report can be found here.