Proven Hedge Funds Excelled During the Pandemic

A comprehensive survey shows the top 50 hedge funds collectively outperformed the S&P 500 in 2020, with less risk and low market correlation.

(Illustration by II; Bloomberg photo)

(Illustration by II; Bloomberg photo)

In 2020, a year defined by the uncertainty of the Covid-19 pandemic, top hedge funds with strong long-term track records not only beat the broad market, but did so with less drawdown and volatility, and largely independent of stock market trends — the ultimate goal of alternative investments.

The top 50 funds generated averaged gains of more than 24% in 2020, when the S&P 500 was up 18.40%, a recent annual survey showed. Average gains in the hedge fund industry were 11.14%, according to alternative investment data and indices company BarclayHedge.

The roster collectively had 5-year net annualized returns of 14.81%, just slightly below the S&P 500’s 15.22%. (The hedge fund industry’s average return over this period was 6.41%.)

Even more compelling is the Top 50 delivered market-like performance with far less risk and low market correlation over that period.

From the beginning of 2016 through 2020, the group’s annualized standard deviation was 11.17% versus the market’s 15.13%. And the Top 50’s average drawdown (the gap from peak to trough and back again) was -12.22% versus the market’s -19.60%.

The correlation of these top funds to the S&P 500 was just 0.31. In stark contrast, the hedge fund industry’s correlation to the market — which suggests how much the average fund tracks the main holdings of the S&P 500 — was 0.92.

Yet, investors must be mindful the funds that made this year’s survey are outliers, not reflective of the hedge fund industry. This is borne out not just by their high risk-adjusted performance but by other characteristics, including longevity. Their mean age is 14.5 years — nearly triple the life expectancy of the average fund —over which time they maintained their consistent performance.

To qualify for inclusion in the survey, fund assets were a minimum of $300 million as of the end of December. They’re following broad strategies — not more narrowly focused sector or commodity funds running high leverage. And they’re not emerging managers. They were launched on or before Jan. 1, 2016.

Who are some of these managers and how have they performed so well historically, especially when all investments were shocked by the pandemic?

The Top Ten

With the exception of Millstreet Credit and the global macro Haidar Jupiter Fund, the top 10 funds in the survey based on the highest 5-year annualized trailing returns were equity. All delivered returns of more than 19% a year over that period, well above the market’s annualized gains of 15.22%.

The top spot (to no surprise) was grabbed by an equity long bias fund, Sosin Partners. What is remarkable is the fund’s trailing 5-year annualized returns were more than 46% and it is run by an idiosyncratic manager that makes stock selection his prime risk management tool.

Sosin Partners led the survey for the second year in a row, despite, in 2020, having experienced one of the most tumultuous years ever. This concentrated equity fund of 8 companies — currently all long positions — was at one point down 55% in March. By the end of the year, Sosin was up net 96.5%.

With his investments selected for their long-term growth potential, Clifford Sosin looked past the chaos that quickly enveloped the markets. He didn’t sell. He didn’t hedge. He added to some collapsing positions with new money coming in.

Two core positions that tried to trigger manager angina was Carvana — the hip online used car shop, which bottomed at $22 per share in March 2020 and is now trading at $334 — and the brick-and-mortar home décor firm, At Home, which traded below $2 per share before rocketing up to $37.

Three years ago, Sosin Partners didn’t qualify for the survey because fund assets were below $300 million. Today, its assets are nearly $1 billion — over $2 billion when counting other pari passu managed vehicles — and the fund is closed to new investors.

Understanding Strategies

A key misperception about hedge funds is the belief they comprise a monolithic industry that moves in unison.

The survey distinguishes the more than a dozen and a half distinct hedge fund strategies, most of which seek to generate returns differentiated from the market. Their performance therefore should be judged by their respective goals.

Strategy-level performance may provide a base guide to what hedge funds have done. But it tells “little about the wide range of fund performance within each strategy,” observes Sam Monfared, hedge fund research specialist at Preqin.

That’s certainly evident in the historical performance of the 21 strategies tracked by the survey, which reveals a narrow range in returns over the trailing 3-, 5-, and 10-year periods. During these three periods, the industry’s annualized gains were one-third of the returns of the S&P 500.

While looking at a single year can be misleading as well, 2020 revealed extraordinary breadth of performance by strategy. Equity long bias, volatility trading, convertible arbitrage, and emerging market funds delivered gains in excess of 15%. At the bottom, equity market neutral, asset-backed securities, and collateralized debt obligation funds were down slightly.

Structured credit strategies were the hardest hit by the pandemic as investors worried about the reliability of interest payments and potential impairment of underlying asset — both of which support these financially-engineered vehicles. This is most evident by the failure of a single such fund to qualify for this year’s Top 50.

Mortgage-backed securities, for example, had been among the most consistent performing funds for many years running. Along with other structured credit funds, they made up 25% of the Top 50 over the previous two years. With a dozen such funds dropping off the survey, this significantly altered the composition of this year’s list.

The remarkable outliers that comprise this survey are evident when comparing their performance with their respective strategy averages.

There are 15 equity long-short funds in the Top 50 — the highest showing of any strategy — that collectively returned nearly 19.5% per year over the past 5 years through 2020. But the strategy average return over the same period was a paltry 4.5%.

The top-performing equity long-short manager over the past 5 years was North Peak Capital (No. 2), which generated annualized returns of nearly 36% over that period. Driving the performance of this $823 million fund, explains co-manager Jeremy Kahan, is “application of private-equity style due diligence in constructing a concentrated portfolio of 10-12 dynamic businesses trading at attractive prices.” The fund typically targets companies worth between $1 billion to $10 billion that are generating strong free cash flow and high returns on invested capital.

Woodson Capital Partners has also generated strong gains, averaging 33.47% over the past 5 years through 2020. The fund’s 11-year track record delivered annualized gains of nearly 20% through 2020, buoyed by performance over the past 4 years.

Since the start of 2016, its worst drawdown was less than 10%. But as is possible with any high-flying fund, Woodson took a sharp hit in the first quarter of 2021 when it lost nearly 23%.

Manager James Davis explained, “many growth stocks that led the market higher in 2020 have lagged it year-to-date in 2021 due to a confluence of factors, such as rising inflation expectations, a growth-to-value rotation, and a post-Covid market reversion.” (Through May, Woodson has pared its 2021 losses to -19%.)

The survey’s eight multi-strategy funds also show substantial collective outperformance relative to strategy average return of peers over the past 5 years: 11.42% versus 2.91%. The two top-performing funds in this category are the venerable $23.6 billion Citadel Wellington (No. 19) that’s been generating annualized returns of 14%, and Hong-Kong based Segantii Asia-Pacific Equity Multistrategy fund (No. 48), which was managing $4.8 billion at the end of last year and has produced annualized returns of 13.8% since its launch 13 years ago.

Segantii’s success, explains founder and chief investment officer portfolio Simon Sadler, was founded on the gradual liberalization of regulatory and corporate standards of the Eastern world. At the same time, Sadler seeks to exploit short-term pricing inefficiencies, especially during sharp bouts of turbulence, that persist across much of the Asian-Pacific region because local markets are often dominated by mercurial retail investors, fluctuating liquidity and restricted capital flows.

Citadel declined to comment for this survey.

The contrast between the average global macro fund performance and the 7 that made this year’s survey is also striking: 12.13% versus 3.48%. Over the last 5 years, the $704 million Haidar Jupiter (No. 7) and $18.2 billion Element Capital (No. 17) generated gains of 22.1% and 14.5%, respectively--the highest returns of all global macro funds in the Top 50.

Both those funds declined to comment for this report. But together their respective performances reflect how disparate fund behavior can be within the same strategy.

Several numbers jump out. Haidar Jupiter’s worst drawdown over the last 5 years was over -32%, while Element’s was a more constrained -7.5%.

Standard deviation can be misleading because it reflects both upside and downside movement. Haidar Jupiter’s 5-year volatility was over 27, while Element’s was 9.4. This helps explains the wide gap in the two funds’ risk-adjusted returns. Haidar Jupiter’s Sharpe Ratio was 0.77; Element’s was a more impressive 1.42.

All that said, Haidar Jupiter bolted out of the gate in 2021, up nearly 33% in the first quarter while Element slipped by nearly -10%.

How Much Does Size Matter?

Some very large funds are strong, consistent performers, including Tiger Global, Citadel, D.E. Shaw, and Element Capital. Seven big funds that made the survey are collectively managing $108 billion, more than double the assets of the other 43 smaller funds that comprise the list. However, 10 of the top 15 funds on this survey each ran less than $900 million in assets.

This annual survey has regularly identified smaller funds as being more consistent long-term top performers than their larger brethren, with 28 of the Top 50 managing less than $1 billion, 20 ran less than $725 million, and 13 had assets of less than $500 million.

This last figure is noteworthy when one thinks of funds that’ve been delivering superior returns over an extended period in time. While one might think something must be off with the manager, more than likely, because of their small scale, such funds simply fly under most investor screens.

Panayiotis Lambropoulos, a hedge fund portfolio manager at the $32 billion pension fund ERS Texas, believes “in the merit of proven, smaller, institutional-caliber managers to help potentially achieve long-term investment goals.” His pension fund has teamed up with the fund of funds manager PAAMCO-Prisma to underwrite small, emerging managers to help boost returns.

“Because of their size,” explains Eric Costa, global head of the hedge funds investment group at the consultancy Cambridge Associates, “smaller managers have the ability to invest meaningfully across a wider universe, compared with larger peers, and move in and out of positions more nimbly, without impacting prices.”

Another quality sometimes revealed among successful smaller funds that have been around for a while is they are less concerned about asset gathering and more focused on fund management. Bob Treue’s Barnegat Fund (no. 42) is an extreme example. The fund regularly qualifies for this survey and has a 20-year track record with net annualized returns of 15%. “I don’t have anything like a full-time marketer. It’s not who I am,” explains the Hoboken, NJ-based manager, who clearly moves to a different beat.

What Allocators Are Thinking

Pleased with the performance of his hedge funds, Marc Sbeghen, co-founder and co-portfolio manager of the Swiss-based alternative investment specialist Iteram Capital, expects to maintain two-thirds of his exposure in the asset class. “Experienced, well-managed hedge funds,” explains the former executive of Banque Privée Edmond de Rothschild, “can control their directionality and exposure in response to changing economic and market conditions better than mutual funds, private equity and credit, venture capital, and real estate, whose orientation is pretty well set when they’re launched.”

This is one of several common sentiments expressed by a host of allocators interviewed for this survey.

Most allocators generally believe the risk of the pandemic to economies and markets is mostly behind them. Mohamed Farid, a principle portfolio manager at the World Bank who’s managing $3 billion in absolute return strategies, thinks, “unless something unexpected occurs, the market impact of Covid-19 for the rest of the year looks benign, as vaccines prove effective, their rollout expands across the country, and economic stimulus continues to prime spending and growth. I expect these forces collectively will drive market prices.”

While he acknowledges the risk posed by variants and the virus’ persistence in hard-hit places like India, he notes stock markets even in Mumbai remain very strong.

Most allocators also believe current inflation fears seem to be transient — caused by bottlenecks resulting from economies reopening — and central banks will not be raising interest rates this year. Toward the end of 2021, however, they expect these banks to start tapering their quantitative easing.

Allocators agree valuations are high and will likely go even higher, because as GAM’s Giovanni D’Alesio explains, “most investors don’t see any other place to go.” But he notes not all sectors and industries are overvalued.

One main reason allocators remain keen on hedge funds is their various strategies extend well beyond high-priced stocks. Hedged equity funds remain in vogue but allocators are targeting managers more focused in delivering uncorrelated alpha.

This has been a priority of the World Bank’s Farid since the financial crisis when its hedge funds lost 22% in 2008. “We target consistent performance irrespective of what the market may be doing,” explains Farid, “and look for managers that can generate pure Alpha with annual volatility of 2-3% and net returns of around 6%.”

With the tremendous rally in growth shares, allocators last year started to rotate into value. Vincent Berthelemy, cross asset strategist and portfolio manager at the $7.1 billion alternative investment joint venture Investcorp-Tages, explains his firm has so far moved around 6% of exposure from growth-focused hedged equity funds to more value-oriented special situations and event driven managers. “If we see a pullback in value,” explains Berthelemy, “we’ll treat this as a buying opportunity to add more value.”

Discretionary global macro is also attracting allocator attention as economies move out of the shadow of the pandemic. The strategy can offer investors a prompt response to unexpected turns in bond and equity indices, interest rates, commodity prices, and volatility.

Fixed-income relative value is also being embraced by many allocators to gain uncorrelated returns through leveraged exposure to corporate and sovereign debt spreads, assets that otherwise are offering virtually no returns and capital risk if interest rates begin to rise in earnest.

Allocators are also hedging inflation risk by moving into commodities (including industrial and precious metals, grains, and fuel) real estate, and businesses protected by large moats that have the ability to pass on higher costs, like some of the tech giants.

Sbeghen explains Iteram is not geographically centric. But he sees a special opportunity in the U.K. as the country deals with Brexit-related issues, the severe hit it took from Covid-19, and a significant sell-off in mid-caps. “We believe these U.K. shares are fertile for M&A and related activity,” says Sbeghen.

While allocators are globally diversified, this exposure is tilted toward the U.S. Cedric Dingens, head of investment solutions and alternative investments at the CHF 10 billion Swiss-based asset manager Notz Stucki, says his firm has “more than half of its exposure in the U.S., a quarter in Asia and about 20% in Europe. We are partial to American markets because of the depth of opportunity in the states and its significant retail activity, which can create volatility and momentum.”

And while many allocators are looking at China as a source of outsized gains, including Dingens who thinks the country will see the fastest economic growth over the near term, down the road others see the country as the leading source of geopolitical risk.

When Opinions Diverge

Allocator disagree on several key issues. While ERS Texas’ Panayiotis Lambropoulos predicts economic data for the rest of 2021 will likely surprise on the upside, he remains cautious about Covid-19.

“Most of the country is functioning as if the pandemic is in the rearview mirror,” explains Lambropoulos. But as of mid-June, the country’s vaccination rate seems stalled in the high-60%.” While transmission, hospitalization, and death rates are all trending in the right direction, he wants to see if these numbers hold past summer and into winter (when people are back inside) to have a clearer understanding where we are in the pandemic.

Moreover, the manager sees serious gaps in vaccination and recovery across a good portion of the emerging world where transmission rates don’t stop at their borders, especially as travel and business continue to open up worldwide. According to recent data, Lambropoulos says only, “16% of the global population has been fully vaccinated.” And that worries him.

With hedge fund assets approaching $4 trillion and a limited number of high-quality, consistent performers, Giovanni D’Alesio thinks allocators need to pay careful attention to managers’ stated capacity limits.

“When a manager starts exceeding that number,” says D’Alesio, “investors should request to see its analysis that justifies higher fund capacity without compromising investment process and performance.” D’Alesio would want to know what specifically changed in a manager’s calculus. If a fund believes, for example, increasing liquidity is enabling it to manage greater assets, D’Alesio says there’s a clear risk that central banks and governments may pull back on liquidity.

He also cautions small-cap managers may allow positions to appreciate into mid-caps and may venture into the pre-IPO market to expand their investment universe, both of which introduce new risks and performance expectations.

Two allocators think Europe offers a solution to overvalued U.S. markets. Elisabetta Manuli, vice president and fund manager at the Milan-based fund of funds Hedge Invest, “thinks European opportunities are more attractively valued compared to US shares, especially since continental recovery is about 6-12 months behind the States.” She says rotation into less crowded European shares has started.

This shift has been further stimulated by the continent’s embrace of ESG, along with the increasing potential of European restructuring, Green technology, and positive market changes — like a greater acceptance of M&A as companies have begun selling underperforming businesses post-Covid. And if Germany’s forthcoming elections bring Green leadership to the continent’s largest economy, Manuli argues that could be a further boost to European exposure.

GAM’s Giovanni d’Alesio also likes Europe. But he notes any shocks that hit U.S. markets are very likely to reverberate across to Europe.

Vincent Berthelemy believes there’s still plenty of dislocation in the space, he thinks certain mortgage-backed securities and collateralized loan obligations can attractively compensate investors for related liquidity risks as housing prices continue to improve.

Last year, ERS’ Lambropoulos expected distressed opportunities would start looking attractive by this time. However, “government monetary and fiscal intervention appears to have contained the economic fallout and bankruptcy rate,” he explains.

The World Bank’s Farid and GAM’s D’Alesio think meaningful distressed opportunities will still evolve. “So far, troubled companies have been able to survive because economies have been pumped full of liquidity and interest rate spreads have not widened, which would trigger borrowing stress,” explains D’Alesio. “However, over the next two to three years, rates may climb and this could generate a rise in defaults.”

Debt Concerns

Several allocators express concern about rising margin debt related to investments. “Just as it helps elevate the market,” observes Lambropoulos, “margin can quickly reverse course if companies fail to meet lofty growth expectations. Increased selling could cascade, leading to margin calls and additional forced selling.”

Soaring overall debt piling up in response to the pandemic worries Eric Knight, CEO and CIO of the Swiss-based asset manager Knight Vinke. “With global debt-to-GDP levels approaching 400% and pandemic-related public expenditures set to increase without restraint almost everywhere,” cautions Knight, “the world’s financial system is more than usually fragile at this moment and will become even more so.”

He finds primary risks in the financial sector where leverage has been rising, contrary to regulatory metrics, which counters the impression of stronger balance sheets. And he sees anecdotal evidence suggesting the level of distress in some countries is completely at odds with popular rebound scenarios.

Knight is worried about southern Europe, including France, and believes the US market is trading--on a debt-adjusted basis--10% above its valuation at the peak of the dot-com bubble.

“The value investor in me feels a correction is long overdue,” explains Knight. But he admits the euphoria driven by vaccinations, government handouts and the lifting of restrictions on travel and social interaction is hard to ignore. “Dealing with this contradiction is hard for many asset managers and often leads to paralysis,” says Knight, especially as the music plays on.

Eric Uhlfelder is an award-winning journalist who has surveyed top hedge funds for 18 years. For a copy of the unabridged 2021 Global Hedge Fund Survey, which includes statistical information on each of the top 50 funds and manager profiles and interviews, contact Eric at

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