A revealing discussion of how the most intriguing hedge funds performed last year and a look at the opportunities and risks that lay ahead.

As stocks soared on the back of a strong US economy that led global growth, the Top 50 kept pace with its historical ROR rallying 13.2%. Emerging markets was the best-performing strategy over all four quarters, having delivered gains of nearly 19%. Two EM credit funds—Sandglass Capital and Enko Africa Debt--even outpaced the market. Credit and fixed-income, and hedged equity managers delivered the next best returns averaging gains of more than 14%, followed by multistrategy and macro funds that each gained on average 11.5%.

Looking ahead, the economy and market entered 2025 in a strong place. But lofty valuations, nagging inflation coupled with higher-for-longer interest rates, and growing confusion coming out of Washington are leading to greater hedging and a nascent shift of assets overseas.

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For the past two years, there’s been the market and then there’s been everything else. And the Republican election sweep likely ensures that the show will continue well into 2025. The Top 50 are on pace to match its historical low-double-digit annualized gains. Through 3Q, they returned 9.2%. Credit, fixed-income, and equity managers generated 10% gains. But emerging market funds continue to lead the pack, returning 13.3% in dollar terms. And one EM manager--Sandglass Capital--returned more than 24%--the only fund that outpaced the S&P 500. This update concludes by taking a clear-eyed look at what the change in US political leadership means, what it ignores, and its potential impacts on the economy, markets, and hedge fund performance. The report also takes a deep dive into why one of the most consistently-performing funds suddenly failed.

The Top 50 gained 6.3% during the first half of 2024, led by credit and fixed income, equity and macro, well behind the market’s remarkable start. Ten funds delivered double-digit returns. But the strategy that continued to surprise was emerging markets with six EM funds having outpaced all other strategies. And one EM credit fund outperformed the market during the first six months of the year.

The 21st annual edition of my global hedge fund survey tracks the most consistent performing funds over one of this century’s most volatile 5-year periods through December 2023.

In addition to providing a wide range of historic return, risk, and correlation metrics for each fund, the report features an interview of Maziar Minovi, CEO of the Eurasia Group, along with four in-depth manager profiles, including veteran distressed investor Jason Mudrick.

A booming tech-driven market did outpace the Top 50 Hedge Funds by about 2 percentage points annually over that time: 15.7% vs 13.7%. But the 50 generated far superior risk-adjusted returns (1.43), nearly doubling the market’s Sharpe ratio (0.75) and tripling that of the average hedge fund (0.53).

Equity, macro, and multistrategy funds, representing more than half the Top 50, delivered the strongest returns.

Emerging market funds were the big surprise. Six made the list with 5-year annualized returns averaging 12.5%. And with 2018’s 5% hurdle rate no longer holding back inclusion of funds that stumbled that year, a half-dozen big name managers finally made the cut.

Despite relief brought from a bull market that’s colored much of 2023, uncertainty-- fueled by persistent inflation, a spike in interest rates, and soaring geopolitical risks--is an even more dominant theme than it was when this survey originally went to press in June. Manager caution, which held back fund performance during the first half of the year, is beginning to be rewarded.

In 2022, the world’s most consistent managers staved off losses by having successfully navigated a whole host of hazards. On average they delivered modest gains. But compared to the market, they hit a home run. Since then things have inverted. A flat first-half performance of this year’s Top 50 funds suggests managers, most of whom made last year’s list, remained cautious, having expected more fallout. But instead of declining further, the S&P 500’s 17% gain was its best first half in this century, and the Nasdaq’s first-half return of 32% was its best in 40 years. Remarkable, considering the Fed is continuing its monetary tightening, earnings are slowing, and the war in Ukraine is intensifying. This rally caught the most consistent managers flatfooted.

For a copy of the update and the main 2023 Survey, please send a request to Uhlfelder@hotmail.com

This is the 20th anniversary edition of my global hedge fund survey. During this time, we’ve seen seismic events affecting economies, markets, and politics. And while 2023 isn’t colored by the outbreak of a pandemic, a new war, or national elections, many investors are still weighed down by uncertainty about what rising interest rates, recession, and war could bring—in spite of the first half market rally.

Last year’s performance of the Top 50 funds proved their value, having outperformed the S&P 500 by nearly 24 percentage points. More than two thirds from that select list qualified for this year’s group, affirming their consistent performance; and 44 of this year’s funds made money in 2022. This helped the Top 50 collectively outpace the market over the trailing five years through 2022 by more than three full percentage points. They did so with considerably less risk than the S&P 500 and a market correlation of just 0.18. And the Top 50 has sustained this strong performance for more than a decade.

This year’s survey includes commentary and outlooks from leading global allocators, economists, four exceptional fund managers. and former US ambassador to Russia Michael McFaul. He shared his thoughts on what it would mean to lose Ukraine and why that can’t happen.

28 February 2023 BarclayHedge

Bucking virtually all market trends, Global Investment Report’s Top 50 hedge funds gained more than 5 percent last year. With fund selection based on the most consistent historical performance through 2021, more than two thirds of the group delivered positive returns in 2022. Leading the way were global macro, multistrategy, and volatility arbitrage funds. This year-end report includes full-year 2022 returns of each fund in the Top 50, analysis and interviews of leading fund managers, and insights from major hedge fund allocators about what to expect.

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