The winner of Barron’s Penta’s 2017 ranking of the Top 100 Hedge Funds doesn’t tick a lot of the boxes for the typical big investor. There’s one mark, however, that would catch any investor’s eye: performance.
Amid wildly erratic hedge fund results, our victor, Madrid-based Alantra Asset Management’s $390 million EQMC Europe Development Capital fund (Class A), posted a 26% annualized return net of expenses from 2014 through 2016. In contrast, the average hedge fund’s annualized three-year return didn’t quite reach 3% in that time, according to BarclayHedge’s return database. EQMC’s gains were nearly three times those of the surging Standard & Poor’s 500 index. To learn more about Alantra and EQMC’s strategy, read our profile of and interview with Alantra CEO Jacobo Llanza and the fund’s overseer, Francisco de Juan. (See related story, “The Winner’s Picks.”)
Alantra and its hedge fund stand out from the hedge fund crowd in a lot of ways. The small fund doesn’t sell stocks short, use leverage, or employ confrontational tactics to get its way. It borrows heavily from private equity’s tool kit to work with managements to improve results.
Another distinction: The asset manager and its key fund take an active, fundamental approach in an era when quantitative investing is booming among leading hedge funds. Barron’s Penta’s champ a year ago, Hong Kong–based Parametrica Asset Management, guided by Xiongwei Ju, who holds a doctorate in finance, uses an equity market-neutral strategy based on statistical arbitrage across many global markets. Parametrica finished at No. 5 this year.
Jacobo Llanza of Alantra Gianfranco Tripodo
Other quant-based firms whose various funds again excelled this year include a Donald Trump favorite, Robert Mercer’s Renaissance Technologies (Nos. 6 and 24); math-and-science talents John Overdeck and David Siegel’s Two Sigma Investments (No. 11); quant pioneer David Shaw’s D.E. Shaw Group (Nos. 18 and 32); and Ken Griffin’s Citadel (Nos. 30 and 37).
Reflecting the difficulty of generating consistent returns in recent markets, a record 61 firms on the Barron’s Penta Top 100 list this year didn’t rank a year ago. In one of many cases of rapidly changing fortunes, a fund we monitor, Mudrick Distressed Opportunity, posted an impressive 39% gain in 2016, following a 26% drop in 2015, preventing it from making our ranking, which is based on three-year returns.
Despite some spectacular 2016 returns like our No. 2 finisher Mangrove Partners’ 51% gain, hedge fund performance continues to disappoint. The average return of the 100 funds on 2017’s list is 11.78%, versus nearly 17% a year ago.
The low and volatile returns are having an adverse effect on clients. Pension funds and financial institutions are seeking incremental returns to meet their own obligations; many funds simply aren’t delivering them. Among the big institutional investors to announce that they would curtail hedge fund investments last year were MetLife,American International Group, and the New Jersey State Investment Council. That makes it harder for hedge funds to refill their coffers. “It will continue to be difficult for fund managers to raise capital, and keeping what you’ve got will be tough,” says Amy Bensted, head of hedge fund products at Preqin, a London-based alternative-asset research firm.
Citadel’s Ken Griffin David Paul Morris/Bloomberg
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Total hedge fund assets under management hit $3 trillion last year for the first time, but that was thanks to higher security prices. Net outflows persisted, and fund liquidations totaled 1,057, the highest level since the financial crisis, according to Hedge Fund Research.
We initially screen out narrow industries and small regions, excluding funds that invest in only one sector or country, and we avoid commodity-focused funds. We will include Asian-Pacific funds, for example, but not China–centric ones. Gold or energy funds are omitted, but diversified commodity trading advisors (diversified managed futures) are considered. And to ensure that we are reporting the results of professionally run shops that offer stability and sufficient liquidity, funds must have at least $300 million in assets and a three-year track record as of Dec. 31, 2016.
Our search starts with information provided by three major hedge fund databases: BarclayHedge, Morningstar, and Preqin, which collectively sort through thousands of funds that meet our basic requirements. We also rely on industry contacts and other sources we deem reliable to report on firms that don’t file with the databases or won’t speak with us. Each firm is contacted to confirm the accuracy of the data and to gather information about its strategy. Funds are then ranked by their annualized three-year compound performance. This year’s reporting was assisted by Contributing Editor Michael Shari and Research Associate Gabriel Alpert.
It isn’t just the lesser-known firms that are falling short. Failing to gain a Barron’s Penta ranking this year were perennial participants such as David Einhorn’s Greenlight Capital, David Tepper’s Appaloosa Management, Leon Cooperman’s Omega Advisors, and Larry Robbins’ Glenview Capital Management.
Is there any good news for investors? Yes. They now “hold many of the cards and can exert pressure in areas like fees,” says Bensted. The 2% annual management fee and 20% take of profits is history. In last year’s fourth quarter, the average fee structure fell to 1.48% and 17.4%, respectively, according to HFR. Some funds, such as Candlewood Investment Group and PSAM, are offering more-innovative approaches, like tiered pricing structures based on how much is invested.
And the longer that poor relative performance persists, the closer we are to an improvement among active managers. As of March 31, Preqin’s broad hedge fund index had returned 11.61% over the previous 12 months. Granted, that vast improvement still trails the 17% return for the S&P 500.
Best of all, there are many funds, net of their fees, that have topped the returns of the stock and bond markets over the past three years. Others have some catching up to do in the next year. Read on.