These are tough times for hedge funds.
After years of positive performance, this year’s selloff in equity markets, along with roller-coaster rides for takeover target stocks such as Shaw Communications Inc. SJR-B-T and Twitter Inc. TWTR-N, are hammering results at the majority of fund managers.
While many hedge-fund managers can rightfully take pride in telling clients that they are outperforming benchmarks such as the S&P 500 index, only a handful of Canadian funds can boast that they’re making money for investors this year.
Scotiabank’s BNS-T alternative mutual-fund index of 61 domestic hedge funds – largely owned by individual investors – is down by 4.47 per cent in the first six months of the year. A separate survey of 59 domestic managers run by Toronto-based Stack Capital shows just 12 hedge funds turned in positive performances so far this year.
In the Darwinian world of money management, some funds are already extinct. New York-based East53 Capital closed its doors last week because of poor performance, after taking money-losing positions on what turned out to be troubled deals such as Elon Musk’s bid for Twitter, which the Tesla CEO is now attempting to drop, and Rogers Communications Inc.’s RCI-B-T bid for Shaw, which faces opposition from the federal Competition Bureau.
East53 had the ability to invest up to US$3-billion as part of a larger family of 270 funds overseen by Millennium Management Global Investments, which has US$56.3-billion of assets. A spokesperson for Millennium and East53 declined to comment on the fund’s closing, which was first reported by Bloomberg.
After several years of record-breaking M&A activity and relatively few takeovers that failed to close, big deals are now facing significant headwinds, which can hurt results at hedge funds that engage in merger arbitrage – investments designed to make money on takeovers.
The past few years were also good to momentum investors – funds that put their money behind stocks that are on a tear, such as growth tech stocks. These managers have been hammered this year by the sharp selloff in tech plays such as Shopify Inc. SHOP-T, Netflix Inc. NFLX-Q or Meta Platforms Inc. META-Q – stocks that traders call “hedge-fund hotels.”
With a number of hedge-fund strategies now completely out of fashion, there’s a sizable gap between a few high-flying fund managers with approaches that fit this market, and laggards who stuck with styles that worked well in recent years. The latter, who used out-of-favour investment strategies such as arbitrage or growth, turned in poor results. At the other extreme, several funds that invest in still-strong sectors such as credit are enjoying banner years.
Hedge-fund managers typically strive to deliver performance that is independent of what plays out in markets as a whole. On this criteria, fund managers are delivering. While the Scotiabank alternative mutual-fund index is down by 4.47 per cent, Canada’s benchmark S&P/TSX composite dropped by 13.92 per cent. And domestic fund managers are doing far better than S&P 500, the U.S. equity benchmark, which declined by 19.99 per cent.
Scotiabank’s alternative mutual-fund index had positive results in each of the past three years, including an 8.93-per-cent rise in 2021.
Stack Capital’s database on Canadian hedge funds tracks 59 domestic managers. Through the first five months of the year – the most recent period results were available – 42 of these managers were underperforming the Canadian equity benchmark, the S&P/TSX Composite. Only 12 managers trailed the S&P 500 index.
The top performer through the end of May was NorthStream Credit Strategies Fund, up by 15.6 per cent. The worst results came from the Venator Select Fund, which was down by 42.2 per cent. Venator subsequently released its results for June: The fund was down 22.8 per cent in the month and has declined by 55.4 per cent during the first half of this year.
In marketing documents, Venator managers say the fund invests in “special situations” that could include takeovers and “strives to generate superior returns by concentrating investments in a small number of opportunities.” Since its launch in 2013, the fund has averaged a 6-per-cent return, and last year, the Venator fund was up by 16.6 per cent.
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Andrew Willis