Commissioned by SALT and written by Eric Uhlfelder

HEDGE FUND INVESTING DURING THE TIME OF COVID-19

The value of this year’s annual hedge fund performance survey through December 2019 was ostensibly turned on its head when a pandemic virtually shut down the global economy and sent securities plummeting during the first quarter of 2020. But a deeper look at these consistently performing funds revealed managers that as a group have largely been able to weather the storm better than the market and their peers.

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Sometime in late February, the world changed, leaving most market observers to believe more than ever that past fund performance should be considered just that.

While the Coronavirus stopped much of the global economy in its tracks, it hasn’t infected the skill set of many proven hedge fund managers. That’s one of the key findings of this year’s annual hedge fund survey.1

Example.

The venerable $30 billion hedge fund shop Citadel has a record of generating impressive returns especially when markets make sharp turns by consistently concentrating on risk and recalibrating exposure in step with anticipated changes in underlying conditions.

It did so when the markets suddenly turned south in the fourth quarter of 2018. It quickly pivoted to profit during the strong rally in 2019. And the firm was mindful of a potential major market shift going into 2020 before the pandemic struck. This enabled three of Citadel’s funds to qualify for inclusion in this year’s survey.

Eric Costa, global head of hedge funds at the consultancy Cambridge Associates, believes there are discernable qualities that will give fundamental equity and credit managers a performance edge, especially in extraordinary times. These traits, reflected in past performance, include:

  • Consistent long-term performance and volatility that reflects a repeatable investment process, a clear commitment to a particular style, and a long-term investment horizon;
  • Alignment of manager and investors interests, including managerial and portfolio transparency; and
  • Stability of client base.

This study identifies 50 of the top long-term performing hedge funds, running broad strategies with at least $300 million, ranked according to their trailing five-year net returns through 2019. Also included are these funds’ net returns for the first quarter of 2020 to capture the initial response caused by the Covid-19 shutdown.