Here Are The Best And Worst Hedge Funds Of 2022

After two solid months for stocks, with October and November standing out as bright green outliers to a generally catastrophic year for markets, December saw the S&P resume its slide with the last month of 2022 capping the worst year for stocks since the global financial crisis, down almost 20% while the Nasdaq lost a third of its value.

Which, of course, means that there were far more losers than winners among those whose (generously paid) job is to outperform the market yet who mostly fail to do so: yes, when it comes to hedge fund returns, it was a story of a small group of outperformers, a lot of mediocre actors and some truly spectacular implosions.

We start at the top, with the final HSBC hedge fund weekly report (full report available to pro subs) which shows that the best performer by far among reporting companies, was Crispin Odey's European fund, which bet on inflation and was rewarded handsomely, with the only triple-digit return among the universe of HSBC-reporters. There were few other marquee names in the top 20 best performers of 2022, which this year was dominated by CTA and systematic funds, with the occasional plain vanilla hedge fund (Greywolf, Saba Capital). Perhaps more notable were the Bottom 20, where the worst performing fund of 2022 - Riverpark - lost half of its assets this past year. A common theme among some of the worst performers was their exposure to China or EMs, with several marquee names such as Maverick and Blackrock Obsidian posting one of their worst performances in years.

Curiously, according to Goldman's Prime Brokerage, which published its latest report overnight (link here), December was actually a far better month for hedge funds than it was for the S&P (as it should be, incidentally). GS Prime writes that fundamental L/S managers – led by Asia focused funds – outperformed the market in December "on the back of the best monthly alpha returns in years." Some details:

Fundamental L/S asset weighted returns +0.39% in December vs. MSCI TR -4.25%

• On an asset weighted basis, Fundamental L/S returns rose +0.39% in December, driven by positive alpha partially offset by beta losses (from market exposure and the market sensitivity factor combined).
  • Excluding beta, Fundamental L/S alpha finished at +2.64%, the best monthly alpha performance in Goldman Prime's record (since 2016), driven by positive long-and-short side returns. From a factor standpoint, Size, China, Asset Selection, sector tilts (Health Care and Info Tech), and Concentrated Positions were among the largest alpha contributors.
  • China and Asia focused funds outperformed and were up +5.0% and +3.5% in December, while US and Europe focused funds finished down modestly by -0.3% and -0.2%, respectively.
  • TMT and Health Care L/S total returns finished at +0.1% and -0.6% in December (alpha +3.1% and +2.5%), respectively. On an asset weighted basis, TMT and Health Care L/S full year 2022 total returns finished at -34.1% and -11.1%, respectively.
  • The equally weighted average and median Fundamental L/S returns for December both finished roughly flat, suggesting large managers outperformed during the month.
• 2022 full year asset weighted Fundamental L/S returns finished at -12.9%.
  • 2022 full year equally weighted average and median Fundamental L/S returns finished at -2.0% and -4.0%, respectively.

Systematic L/S asset weighted returns were +0.58% in December

• On an asset weighted basis, Systematic L/S managers posted total returns of +0.58% (alpha +0.35%) in December
• Crowded Longs, Asset Selection, Concentrated Positions, and Dividend Yield were among the largest alpha contributors in December.

But while Fundamentals LS funds were down double digits in 2022 despite a solid December, the standouts of 2022 by a wide margin were Systematic L/S funds, whose returns closed the year at at +15.8%, consisting entirely of alpha (17.80%) with beta subtracting a modest 2%.

Looking at actual Flows, GS Prime observes that hedge funds mostly reversed the trends in Oct/Nov, as hedge funds heavily net sold Macro Products and modestly net bought Single Stocks in December.

• The GS Prime book saw the largest net selling in 6 months (-1.0 SDs one-year), driven by elevated short sales outpacing long buys 1.5 to 1.
  • Overall Gross trading activity – long and short combined – increased in 20 of the last 22 trading sessions, suggesting hedge funds were actively trading throughout the month of December.
• Macro Products (Index and ETF combined) saw elevated net selling in December (-1.0 SDs one-year) that reversed ~30% of the cumulative notional net buying in the previous two months, driven by long-and-short sales.
• On the other hand, Single Stocks were net bought for the first time in 3 months (+0.2 SDs one-year), driven by long buys modestly outpacing short sales 

Finally, looking at total exposure, it's not a surprise that hedge funds continued taking chips off the table and overall Prime Book Net leverage and L/S ratio ended 2022 near multi-year lows, while Fundamental L/S Net leverage and L/S ratio ticked up in December. Here is how the overall Prime Book stacked up:

• Gross leverage -6.1 pts MoM to 226.5% (9th percentile one-year), Net leverage -3.8 pts MoM to 63.9% (0th percentile one-year)
• Long/Short ratio (MV) -1.9% MoM to 1.789 (3rd percentile one-year)

There is much more data on hedge fund performance, returns and exposure in the full GS Prime report available to professional subs.

We next look at several of the best performers of the past year starting with...

Crispin Odey, a long-suffering bear and Fed fighter, is celebrating his best ever year of gains since he started his hedge fund three decades ago (however not before suffering multiple consecutive years of double-digit losses).

As noted above, Odey's flagship European Fund surged 152% at the end of the year, according to Bloomberg, powered by his highly leveraged short wagers on long-dated UK government bonds as inflation and political turmoil roiled the British economy.

The returns mark a remarkable comeback for Odey: Bloomberg reports that the billionare has now fully recouped losses accumulated between 2015 and 2020 when his bearish wagers repeatedly failed to pay off. The fund was up as much as 193% last year but gave up some of the gains during the fourth quarter, another document shows.

In one of the most dramatic hail marys in recent history, Odey - who has bleeding badly heading into the past few years - had built up a huge short wager against UK government bonds mostly related to two U.K. government securities that mature in 2050 and 2061. At one point, the bet totaled almost 800% of the net asset value of his hedge fund. Frequently mocked for this massive wager, in the end the position generated huge profits as inflationary pressures soared in the UK and around the world; the UK's mini budget fiscal crisis which nearly wiped out the country's pension funds, did not help. The fund manager has since reduced the size of that trade to about 200% of the fund’s net asset value as of the end of November, according to the investor document. Macro hedge funds were up about 2% on average through November last year, according to data compiled by Bloomberg.

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While nowhere near a household name, another hedge fund that generated similar returns in 2022 was Neal Berger's Eagle’s View Capital Management, whose remarkable 163% return in 2022. After running it as a fund of funds for 16 years, Berger decided to add his own fund to the mix. As Bloomberg reports, the Contrarian Macro Fund launched initially with partner capital in April 2021 to load up on bets that the Federal Reserve would unwind a decade of stimulus — even as policy makers and macrotourists were describing inflation as “transitory.” By the time the Fed reversed course, Berger was starting to accept external money.

"The reason why I started the fund was that central bank flows were going to change 180 degrees. That key difference would be a headwind on all asset prices,” said Berger. “One had to believe that the prices we saw were, to use the academic term, wackadoodle."  They were indeed, and Berger's bet proved prescient, not to mention profitable, delivering the new fund a return of about 163% in 2022, according to an investor document seen by Bloomberg. Berger declined to comment on the fund’s returns. New York-based Eagle’s View manages about $700 million in total, with $200 million in the Contrarian Macro Fund. Indeed, that is the irony of this market: any fund that outperforms in 2022 will by necessity be small, because years of underperformance under a centrally-planned market when the Fed put was still in play, meant death by a thousand rate cuts which wittled away AUMs at most bearish funds to almost nothing.

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While nowhere near as impressive, David Einhorn’s $2 billion Greenlight Capital posted a solid 36.6% return last year, also recouping losses that his flagship fund had posted since 2015. The fund rose 3.5% gain in December, a gain which helped send Greenlight above its high-water mark for the first time in years, after it plunged 20.4% in 2015 and 34.3% in 2018. This means that Einhorn can reinstate full fees for investors who had experienced those losses. The returns came as value shares outperformed after years of lagging behind technology and other growth stocks, which tumbled last year.

In January 2022, Einhorn pivoted from “cautious” to “bearish,” he told investors in his third-quarter letter. One of his biggest long bets was a wager that Elon Musk would have to honor his agreement to buy Twitter; in the end, Musk did just that after several months of trying to avoid closing the deal.

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Among the bigger quant funds, DE Shaw was one of the standouts, as its two biggest hedge funds posted returns of at least 20% last year. The quant giant, which manages more than $60 billion, gained 24.7% in its flagship Composite fund, Bloomberg reported. The fund is D.E Shaw’s largest and makes bets across various asset classes and geographies. DE Shaw posted a similar return at its Oculus fund which mostly makes macro wagers; it rose 20% last year.

As noted above, unlike vanilla L/S fundamental funds, multistrat, CTA and macro hedge funds broadly had one of their best years in 2022, as spiraling inflation and central bank actions prompted big swings in bond and equity markets, while solid trends across various asset classes such as the USD, rates or commodities, allowed trend-followers to generate striking returns. Many of the industry’s biggest names in those strategies posted double-digit gains.

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One hedge fund which we were unfamiliar with, yet which has posted solid returns not just in 2022 but also in prior years, is the $1.6 billion Anson Funds. What we find most impressive, is not so much the fund's 2022 return  (where it's 7.6% return still made the top 5%-ile of all funds for the year) but its performance in the prior two years, when it posted 40%+ profits in both 2020 and 2021. Just as remarkable: in its 15 year history, the fund has had just one down year (no, it wasn't 2008)...

... allowing it to generate a 800% total return since 2007.

Among the fund's short positions are what it dubs "Retail momentum and stock promotion", as well as high valuation on poor businesses or fads, and companies that exhibit fraudulent behavior, while longs are companies with strong secular tailwinds, as well as positive price momentum and attractive valuations.

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On the other side of the equation we have the losers, and there were plenty...

... but none as jarring as companies that had been long tech - a strategy that worked phenomenally well for much of the past decade... and then imploded in the past year.

We start with tech-heavy hedge fund Light Street Capital Management which in 2020 posted a banner year on bets including Amazon.com and Alibaba. However, that was the last of the good times. The firm, along with other once-high-flying stock hedge funds, is coming off a second year of losses that erased billions of dollars in clients’ wealth.

Light Street, Whale Rock Capital Management, Tiger Global Management and Perceptive Advisors each posted declines of more than 40% during the last two years, according to people familiar with the returns. Those losses could prove problematic for smaller firms, given that investors pay lower or no fees on gains until they’re made whole.

The back-to-back downswings at some stock funds created huge dollar losses for clients because many tech- or health care-focused funds minted money when companies like Facebook parent Meta Platforms Inc., Tesla Inc. and Amicus Therapeutics Inc. were booming. Yet as inflation picked up late last year, these same shares nosedived — and few funds increased their short bets to take advantage of the fall. 

The poster child for the reversal in fortunes is Chase Coleman’s Tiger Global hedge fund which plummeted a shocking 57% over the past two years; in dollar terms it erased all the gains it made since the end of 2018. The firm managed about $15 billion across its hedge and long-only funds as of Sept. 30, with an additional $43 billion in private investments, although nobody has any idea what the real value of these "private investments" is; at one point Tiger Global managed over $100 billion. Good luck replicating that.

Another former high flyer is  Alex Sacerdote’s Whale Rock which tumbled 47% over the past two years. He now manages about $6 billion, compared with $12 billion at the end of last year. The hardest hit is Glen Kacher’s Light Street. The firm, which oversaw about $2 billion as of the end of 2021, has lost almost two-thirds of its value over two years. Joe Edelman’s Perceptive Advisors, which focuses on the life-sciences industry, tumbled about 49% in the same period.  

Then there are the casualties: some funds, such as Gabe Plotkin's Melvin Capital Management, shuttered in May after losing almost half his clients’ investments in less than two years. Some complained that he didn’t try to make back some of their money, despite collecting hefty fees for six years while posting annualized returns of 30%.  Ironically, if only the bearish Melvin had survived until the end of the year, it probably would have been up double digits.

Online used-car seller Carvana took a particularly brutal toll on the hedge fund industry this year. A one-time hedge fund darling, it hit a high of $376.83 in August 2021 and now trades for less than $4. According to Bloomberg, two firms invested in Carvana that hung on through the third quarter — and marginally added to their positions then — were Clifford Sosin’s CAS Investment Partners and Spruce House Investment Management, founded by Ben Stein and Zachary Sternberg. The car retailer made up 24% of Spruce House’s $550 million in US-traded companies in the third quarter, according to its latest regulatory filing.

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The bottom line, however, is that on net, it was a mixed year for hedge funds, which managed to outperform plunging stock and bond markets in 2022 (that's not saying much)

“If you just looked at the headlines, you would have thought it was a disastrous year for the industry,” said Jon Caplis, head of hedge fund research firm PivotalPath. “Yet our composite index is the most stable it’s been in years,” with the change in performances from month to month extremely low compared with historically large movements in the stock market.

Hedge funds, on average, fell 1% this year through November, according to an index of 1,157 funds tracked by PivotalPath. In fact, one may almost say that for once, hedge funds did precisely what they are paid (so very handsomely) to do: hedge.

Much more prime brokerage and HF performance data available to our pro subscribers in the usual place.