Which Hedge Funds Strategies Performed Best During the Recent Financial Crisis?

The immediate shock of the COVID-19 crisis sent markets tumbling. In this tough environment, the defensive strategies of hedge funds revealed their value. We looked at the results to see how the industry did overall, along with the fund strategies that performed best during these unusual conditions.

Overall Industry Trends

When markets crashed during the start of the COVID-19 crisis in March, it was difficult for nearly any strategy to generate a positive return, but hedge funds significantly outperformed the overall market. The average hedge fund return was -10.38% through the quarter ended March 31. This was nearly 10 points better than the S&P 500, which lost -20%, according to data from Preqin.

After the initial shock wore off, beginning in late March and continuing to today, a completely different story unfolded as the market bounced back in a major way, making up much of the lost ground. Hedge funds continued to generate Alpha. YTD through April, the average net return of all hedge funds was more than 4 percentage points higher versus the S&P 500 (-5.62% for hedge funds versus -9.85% for the S&P 500 index.) A limited poll of our client base indicates that the trend has continued through May and into June.

Several prominent funds, like D.E. Shaw and Baupost Group, predicted that the environment and high market volatility will continue to benefit hedge funds going forward, so they reopened their flagship vehicles to take advantage.

Strategy Breakdown

While hedge funds as a whole outperformed the market, some did much better than others. Funds focused on CTAs were the only group that finished with positive returns during the immediate COVID-19 crisis, with an average return of 1.64% through the end of April 2020. Since CTAs are typically uncorrelated to equities, this approach may have helped these firms diversify against the market downturn.

Macro, relative-value, multi-strategy and credit-strategy funds also performed reasonably well. Even though they posted a negative average return, they still did better than the hedge fund industry average thanks to being less equity weighted.

On the other hand, event-driven and equity-based strategies lagged behind the hedge fund average. Equity and event-driven funds got off to a particularly weak start in Q1, due to their equity exposure, but they also posted the best results of all hedge funds during April for the same reason.

Notable Performers

The high market volatility created an opportunity for hedge fund managers who got the timing right. Bill Ackman, at Pershing Square, netted over $2 billion on a single trade shorting the market.

Pierre Andurand and Boaz Weinstein of Saba Capital, and Eric Cole of Warlander Asset Management were other prominent managers who posted impressive first quarter returns of 30% or more by shorting the market.

Some macro-based fund strategies also did very well, including Alan Howard’s Brevan Howard Fund and Andrew Law’s Caxton Global Investment. They were able to generate positive returns during the crisis by focusing on currencies, interest rates and commodities. Performances like these helped push macro-focused funds to have the second-best average return out of all strategies through April.

On the other hand, stock-picking hedge fund managers saw large losses due to the market crash. Larry Robbins with Glenview Capital lost 30.47% and Dan Loeb lost 16% during Q1. The spring market rebound could help equity-based funds deliver better results for Q2.

As the country begins to reopen and the economy recovers, hedge fund managers will look to continue their strong stretch that helped them generate Alpha to start the year.

As always, please contact your Anchin Relationship Partner or Jeffrey Rosenthal at 212-840-3456 with any questions that you may have.