2015 was supposed to be another double-digit growth year for the market, instead as showed yesterday, it was the "year when nothing worked [18]."
In the words of BMO's Lowell Yura [19], "this year is a wake-up call to think about lower returns for the next several years," warning that "investor expectations for both equities and bonds have been [mistakenly] elevated by recent history." Jim Bianco added that 2015 could be the worst for asset allocation funds since World War I: "for the first time since 2001, none of the major asset-classes returned more than 10%."
[20]
However, while most hedge funds will be glad to close the books on a year in which they once again dramatically underperformed a market which hugged the flatline courtesy of just a few stocks (even as most stocks posted substantial declines) and where "hedge fund hotels" such as Valeant suffered dramatic implosions, a handful of traders generated impressive returns for their investors and made billions by going against the herd.
One was John Armitiage, whose Eggerton fund bet against the "oil has bottomed" herd and made a killing. As the WSJ reports [21], "most Wall Street traders early this year predicted oil prices would rebound through 2015 and buoy the drillers and equipment providers with close ties to crude. But John Armitage believed more trouble was ahead.
That uncommon conviction and related bearish bets helped his firm Egerton Capital LLP earn $1.5 billion after fees, making Mr. Armitage one of the few to grab a big score in a year that bewildered many on Wall Street.
[22]
Mr. Armitage’s $15 billion London firm quietly booked the $1.5 billion profit with its bearish energy wagers and overall pivot to safer markets in the U.S. and Europe.
Another who "defied conventional wisdom" was Maverick Capital's Lee Ainslie, who did not buy the "no brainer" Kool-Aid and bet - indirectly - against Wall Street’s most widely held stock: Apple Inc. "The investor thought Apple was due to disappoint, but he was loath to take a lone stand against the world’s biggest company by market capitalization even as he decided to avoid some shares owned by rival hedge funds beginning in May."
So Maverick’s San Francisco-based technology team found a different way to channel that instinct. Maverick placed bets against makers of parts and accessories for Apple products, including many based in China, people familiar with the matter said.
That stance reaped profits when the country’s economy took a dive this summer and worries mounted about sales growth for Apple products, including the iPhone. Apple shares have fallen 15% in the back half of the year.
[23]
The Maverick fund’s 16% gain in the year to date amounts to more than $1 billion in trading profits for 51-year-old Mr. Ainslie, who was initially backed by Texas entrepreneur Sam Wyly.
Recall that we said back in the summer of 2013 [24] (and repeated against recently [25]) that in a market as broken as this one (now acknowledged even by such "reputable" institutions as Bank of America [26]), the best "alpha generating" strategy is to go long the most shorted hedge fund names, or in other words - to do the opposite of what the herd is doing. Finally this idea is making headway, and as the WSJ notes "other hedge funds now are coming around to Mr. Ainslie’s recent approach by trading against the views of their peers."
“We’re consciously trying to be in areas where there isn’t as much hedge-fund concentration,” said Matthew Iorio, founder of $1 billion hedge-fund firm White Elm Capital LLC.
Mr. Iorio said he is staying away from owning “what’s obvious,” such as big U.S. banks that may benefit from a recent decision by the Federal Reserve to raise interest rates for the first time in nearly a decade.
Overall, commodities were the "main pain" sector, one which left many "widows" (assets at the top 10 commodity hedge funds have dwindled to just $10 billion from a peak of $50 billion bin 2008), but was also the place where a few could truly stand out.
One other place that saw huge volatility and major pain was currencies: starting with the SNB's shocking revaluation of the Swiss Franc, continuing to the EM tantrum after the Chinese devaluation of August, and concluding with the Mario Draghi massacre of EUR-shorts in early December, most macro hedge funds escape unscathed, and in some very prominent cases such as Fortress Macro, decided to shut down altogether.
One person who did succeed in this year's treacherous FX landscape was a South Korea-born manager who said she produced a more-than-120% return with bets against the euro, as well as the Australian dollar and Brazilian real as the commodities rout took hold. "Melissa Ko, 48, spoke no English when she moved to the U.S. in her teens.
She started her own hedge fund after rising through the ranks at securities firm Bear Stearns & Co. Inc., and continued to invest her own money upon closing the fund two years ago.
[27]
This year her gains amounted to $60 million, she said, pushing her personal fortune above $100 million. She used leverage, or borrowed money, of up to eight times to boost returns.
Her success may prove to be fleeting however: "heading into 2016 she is adding a bearish wager against the Japanese yen and joining peers on a renewed bet against Europe as policy makers’ powers on the continent wane. She said she thinks the euro will fall below parity against the U.S. dollar in the coming year."
The problem with the short Yen, long Euro trade is that it is precisely what Goldman recommends as its top trade for 2016 and those never work out well for anyone but Goldman's prop traders/flow who take the opposite side of its clients, especially considering the surprising strength of the Yen in recent weeks after the latest disappointment by the BOJ, which came just days before JPM's Tohru Sasaki, Tokyo-based head of Japan markets research, warned that the USDJPY will gain 110 next year from about 121 now, the most bullish among around 60 forecasts compiled by Bloomberg. Worse, he sees the equilibrium exchange rate at "below 100."
For now however, let's celebrate those few hedge funds and traders who dared to think originally and traded against the herd which for the 7th year in a row has disappointed with its returns, which is to be expected in a time when central bankers themselves are the market's Chief Risk Officers, and when hedging is unnecessary (after all central banks jump right in whenever there is even a modest blip) and meaningless (there is no possible paper-based hedge against loss of faith in central banking).
Finally, for all those curious, here according to HSBC, are the year's biggest winners and losers.
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