For These "Growth" Hedge Funds, It's Already The Worst Year On Record

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by Tyler Durden
Wednesday, Feb 02, 2022 - 08:29 PM

One week ago we reported that with a few days to go in the month, hedge funds were already experiencing a "catastrophic month", because according to Goldman's Prime Brokerage, in the first 16 trading days of 2022, or the first 4 weeks of the year, "Fundamental L/S funds are down 7.2% (alpha -4.0%)", which meant that "using Prime positions in Jan ’16, Fundamental LS returns had only experienced worse drawdowns in March ’20, and Q4 ’18."

One week later, nothing had changed and in an update from Goldman Prime we learned that Equity Fundamental L/S hedge funds had lost another -4.08% this week, bringing year-to-date performance to -9.38%.

Which begs the question: if most hedge funds can't outperform the market when it is rising, and most hedge fund underperform the market when it is dropping, what exactly are they "hedging" (spoiler alert in case you haven't noticed yet: zero).

Philosophical questions aside, today the WSJ confirmed what our readers already knew, writing that the "stock markets’ selloff in January dealt double-digit losses to a swath of hedge funds investing in technology and other fast-growing companies, sparking questions about whether a popular and lucrative strategy for these firms is running out of steam."

Some examples of the carnage:

  • Tiger Global, perhaps the best known hedge fund punting into high beta, high "growth" stocks, lost 14.8% in January.
  • Melvin Capital, which we profiled last week, and Light Street Capital Management both lost 15% following double-digit losses in 2021.
  • Whale Rock Capital Management lost 15.9% for the month in the share class that invests in public and private companies, following a 9% loss last year.

Other hedge funds that bet aggressively on growth, including London-based Pelham Capital and Atika Capital Management in New York, were down double digits. 

Hedge funds investing in biotech were especially badly hit, suffering major losses in January. Joseph Edelman’s biotech hedge fund Perceptive Advisors lost 18%.

Long story, short: for most hedge funds this is already the worst start to a year on record, and unless the Fed capitulates and makes a dovish relent, it won't be the market that crushes them - the incoming flood of redemption requests should suffice (and is why such marquee names as Citadel and Millennium are forcing investors to agree to 5+ year lockups if they want to keep their money at the multistrat giants).

The carnage marks one of the worst starts to a year for fundamental stock pickers in recent memory. It adds to rare losses many growth and technology hedge funds suffered last year, as expectations of higher interest rates hit many of the stocks they favor.

Not everyone's month was a disaster: according to Bloomberg, Discovery Capital gained 4% in January after ending last year up 18%, and gaining 55% in 2020, becoming one of the few hedge funds to make money in a month of market turbulence.

Rob Citrone’s $2.4 billion macro firm benefited from the rotation from growth stocks to value, according to a person familiar with the matter. The fund’s portfolio was positioned for a hawkish Federal Reserve and a taper tantrum. It profited from shorts on growth stocks, long wagers in emerging markets and bets around the energy sector and special situations, the person said.

How did everyone else do? Professional subscribers who wish to peruse the latest weekly HSBC Hedge Weekly performance review can do so in the usual place, and here is a summary of the top and botttom 20 hedge funds of 2022: