April 14, 2016 / 7:05 AM / 3 years ago

Golden ticket hedge funds battered in rough start to 2016

LONDON (Reuters) - Big-name hedge funds favoured by pension funds and the ultra-wealthy for their track record of stellar returns took a battering in the first quarter of 2016, with some posting their worst-ever start to a year on record.

An investor looks at an electronic screen at a brokerage house in Hangzhou, Zhejiang province, January 26, 2016. REUTERS/China Daily

Most funds that deploy multiple investment strategies across asset classes have posted steady returns every year since the financial crisis, enabling many to charge hefty fees as investors queue up to put their money in. Last year $26.3 billion was poured into these so-called “multi-strategy” hedge funds according to data from Eurekahedge.

But some of the most well-known funds in the class have had a painful start to the year, hit by correlated falls across asset classes caused by worries over the Chinese economy and falling oil prices.

U.S. funds Citadel and Millennium Management are down 6 percent and 4.2 percent, respectively, to March 30 and March 31, bucking a strong post-crisis track record for both that has involved cutting underperforming teams.

“[Multi managers’] selling point is that they are diversified across a lot of different trades and ways of making money and so they tend to not feel a lot of pain in orderly markets like if equities slowly sell off,” said Anthony Lawler, head of portfolio management at hedge fund investor GAM.

“Where the pain can be magnified is in large correlated moves, like January to the middle of February, and then again from mid-February to the end of March.”

The Standard & Poor’s 500 index of leading U.S. stocks fell 10.1 percent from January through Feb. 11 before rebounding 12.3 percent to March 31, which caused the VIX gauge of stock market volatility to hit a five-month high. Millennium’s founder, Israel Englander, is very good at identifying and managing risk, said GAM’s Lawler. “To be down over 4 percent for the quarter is a painful and unusual result for his funds.”

In the United States Jabre Capital Partners and Visium Asset Management, were both down 5 percent to March 15 and April 1, respectively.

Europe’s biggest names fared little better.

Sweden’s Brummer & Partners’ main fund fell 3 percent to record its worst-ever first quarter, while Man GLG’s $900 million multi-strategy fund was down 1.8 percent by April 1.

All of the hedge funds in this article declined to comment or did not respond to requests for comment from Reuters.

The funds that fared the worst were those that had the biggest exposure to equities, whereas those with more exposure to other positively-performing strategies, such as systematic or commodity trading advisors, did better.

Despite the shaky start to the year, few investors are running for the exit door just yet, with just $500 million pulled in January and $100 million added to the strategy funds in February, Eurekahedge data showed, taking total assets invested in these funds to $362.6 billion.

“[While] there has been a lot of engagement with investors I haven’t heard of material redemptions,” said Joe Leckie, head of sales for HSBC’s European prime finance team.

Most investors say they are happy to keep the faith in these historically strong-performing funds, for now.

“We are long-term investors,” said Hilmi Ünver, head of alternative investments at Notz Stucki & Cie, which has $1.9 billion in hedge funds, adding losses for managers were part of investing.

“In general, our managers manage to put back on track their returns.”

That said, some may use the poor performance to argue for lower fees, said Tomas Kmetko, research consultant at Cambridge Associates. Some of these funds charge investors a management fee of up to 2 percent of the value of their assets under management and a 52 percent slice of any profits.

That compares with fee pressure in some parts of the industry that have seen managers accept a 1 percent management fee with a 10 percent performance fee.

“I think some managers will look - particularly if you’re a sizeable investor - for a fee break or something,” said an operational due diligence head at a private bank in London.

“But other managers that are very high conviction over what they’re doing will say this is part of what is to be expected and things will improve now that volatility is decreasing and there seems to be more scope for top performance.” 

($1 = 0.8766 euros)

Additional reporting by Lawrence Delevingne, editing by David Evans

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