Hedge funds may be hit with $20 billion in redemptions during the remainder of this year.
The figure comes from Citco, and it’s contingent on any number of things. Scheduled withdrawals exceed $13 billion for this quarter and more than $6 billion through year-end, according to the fund administrator.
But given the potential for new investments over that period, and the possibility that existing withdrawal requests could themselves be withdrawn, it’s not possible to make definitive statements. Or at least about the future.
It is possible, though, to make definitive statements about the past, and on that score, subscriptions outran redemptions by a cool $13.6 billion during the first quarter. The figure (below), shows the breakdown by month. For context, investors added to hedge funds on Citco’s platform during every quarter last year. Q1’s net inflow was double Q4’s.
Generally speaking, monthly flows have been positive on net, with outflows concentrated during “the quarter-end trading cycle,” as the firm wrote, in its latest update.
If you’re wondering about returns, they were good or bad, depending on your perspective. In Q4 of 2021, almost 61% of funds managed positive returns, according to Citco. That figure was just 40.2% in Q1 of this year. The biggest drag came from the biggest funds, with those controlling $3 billion or more posting a -3.7% return on a weighted average basis. Smaller funds fared better, but just barely. The average return from equity strategies was around -7%, again on a weighted average basis. That figure for commodities: 12.09%.
Citco noted that Long bias funds underperformed versus L/S. In the latest installment of Goldman’s hedge fund trend monitor, the bank’s Ben Snider noted that “a plummeting equity market and the even worse performance of the most popular long positions have led to the worst start of a year on record for hedge fund returns.”
One problem (the main problem, even) appeared to be a reluctance to abandon placeholder longs and perennial growth favorites. Or, more precisely, a reluctance to abandon them fast enough.
“The end of the TINA environment has corresponded with a sharp hedge fund rotation away from long-duration Growth stocks,” Snider said. The figure on the left (below) underscores the scope of that rotation.
The figure on the right (above) shows the impact of surging real yields on richly-valued stocks.
In simple (and, for regular readers, all too familiar) terms, the rapid rise in real yields was kryptonite for the frothiest names and speculative corners of the market more generally. Hedge funds were compelled to respond, and in all likelihood, the rush to trim exposure accelerated the declines in a not-at-all virtuous loop.
“From 2009 through 2019, stocks with EV/sales multiples greater than 10x had gradually grown as a share of the equity market and, to an even greater extent, as a share of hedge fund long portfolios,” Snider wrote, adding that “those weights leapt higher in 2020 as fiscal and monetary stimulus caused equity valuation multiples to surge, particularly for extremely high multiple, long-duration Growth stocks.” That’s over now. And as such, hedge funds’ overweight in high multiple shares has collapsed (figures below).
Over the course of the first quarter, hedge funds cut net positions in discretionary and tech shares by 306bps and 116bps, respectively, with the latter now the most underweight versus the Russell 3000 in at least a dozen years.
And yet, out of 16 new names in Goldman’s Hedge Fund VIP basket, five were tech shares. Just four were energy stocks. Notwithstanding the rotation, all five FAAMG companies retained their perches at the top of the list. Microsoft is 1, Amazon 2, Alphabet 3, Meta 4 and Apple 5.
That’s been problematic in 2022. So problematic, in fact, that Goldman’s Hedge Fund VIP list is mired in the worst stretch of underperformance versus the S&P in the basket’s history (figure below).
On the off chance you haven’t noticed, it’s been a bad year so far for equities, in no small part because the FAAMG “generals” (as it were) command such enormous weight at the benchmark level. Those stocks only went up during the so-called “slow-flation,” “Goldilocks” macro regime. As they rose, they became synonymous with a variety of factors and styles used to construct a dizzying array of factor products and smart beta vehicles. That funneled still more money into the same handful of mega-cap growth stocks, swelling their market caps and reinforcing the crowding dynamic.
For active managers, the only way to outperform was to simply buy the same stocks, only with leverage. “Fundamentally, and macro-wise, PMs have been hiding in ‘leveraged long-duration’ equities proxies for a decade,” Nomura’s Charlie McElligott said last month. “Survivorship bias meant that in order to thrive — to outperform benchmarks and gather more assets — you simply built a ‘Doomsday Momentum Machine’ that kept piling into these secular growth names at nosebleed valuations, which were being justified by absurdly low rates through ZIRP, NIRP and LSAP / QE policies around the globe,” he added. At the same time, that bent entailed being short (de facto or outright) anything that even looked like cyclicals.
As detailed here, all of that’s reversing in 2022, with predictable results. “Headwinds from both beta and alpha have created an extremely difficult environment for hedge funds so far in 2022,” Goldman’s Snider went on to say. At the lows earlier this month, the S&P marked its worst return through that point of any calendar year since 1932. Goldman’s Hedge Fund VIP basket, Snider remarked, “fared even worse.”
