Managers see growth in year ended June 30

Hedge fund managers found themselves in two very different environments over the year ended June 30 with fairly benign market conditions in the second half of 2021 that benefited long/short equity and long-biased strategies.

But given expectations of rising inflation, higher interest rates and slower economic growth, hedge fund managers were forced to do a 180 halfway through the year and write new playbooks, shift to new strategies and deal with inquiries and allocations from investors looking to hedge funds for diversification, industry sources said.

Despite tough market conditions and declines in some firms’ assets, the 102 hedge fund managers that participated in Pensions & Investments’ 13th annual survey had aggregate worldwide assets under management of $1.44 trillion in the year ended June 30.

That’s up 8.3% compared to the hedge fund universe total of $1.33 trillion as of June 30, 2021.

By another measure, the worldwide AUM of the 73 hedge fund firms that participated in P&I’s survey in 2022 and 2021 was up 6% to $1.24 trillion for the year ended June 30.

A significant newcomer to the 2022 hedge fund survey was London-based absolute-return and macro manager Ruffer LLP, London, which had $31.7 billion in AUM, placing the firm in the 12th slot on P&I’s manager ranking.

Investors appreciate the consistency of Ruffer’s macro strategies, especially given that they can make money in down markets and provide “reasonable returns in benign markets and in both deflationary and inflationary environments,” said Omar Kodmani, head of international and institutional, in a interview.

The firm is seeing broad institutional interest in its strategies globally, with the most active inquiries from the U.S., Mr. Kodmani said. While Ruffer’s home territory is in Europe, he said Asian and Middle Eastern institutional investors also are exploring macro strategies.

Ruffer’s investment team is monitoring global markets with a very careful eye.

“We are in a significant regime change from low and falling inflation to rising inflation. There will be changes in the correlations that have been in place for at least three to four decades,” said Alex Lennard, Ruffer’s investment director, who was on the call with Mr. Kodmani.

Mr. Lennard stressed “we think liquidity in financial markets will tighten and the impact is underappreciated. Investors need to be cautious about complacency regarding currency to see how markets will tolerate it.”

Bridgewater Associates LP, Westport, Conn., the largest manager on P&I’s list, reported $126.4 billion in worldwide hedge fund assets as of June 30, up 19.6% from the same date a year earlier.

Unlike some hedge fund managers, Bridgewater has found that current market conditions have been “a great alpha-generation environment. It’s been a great macro environment with a lot of volatility across most currencies, interest rates, and equities in 200 liquid markets,” said Kyle Delaney, president and chief commercial officer, referring to the firm’s flagship fund Pure Alpha Fund II, which is mostly closed to new investors.

Given inflationary impacts not seen since the 1970s, Mr. Delaney said “the traditional 60/40 diversification approach isn’t working. In an environment where there’s a shift from growth to inflation, you’re much better off diversifying broadly across assets, geographies and currencies.”

He added that the firm’s institutional investors are seeking advice from the firm about navigating current conditions.

Most of Pure Alpha’s growth is from performance, he said.

Bridgewater’s Pure Alpha (18 volatility) offering returned 32.1% year to date through June 30, according to a source who asked not to be identified.

Paul Kreiselmaier, Seattle-based director, hedge funds at consultant Verus Advisory Inc., noted that there was a strong bifurcation between the two six-month periods. “The year ended June 30 was really a tale of two halves,” he said.

In the second half of 2021, hedge fund strategies that did well included long-biased approaches and long/short equity, he said, adding that “the wind was at their backs.”

In contrast, Mr. Kreiselmaier stressed that “at end of 2021 when inflation began to rise and from January 2022 onward when the Federal Reserve Bank began to raise interest rates, investors became more worried.”

He said asset owners began to look for fixed-income substitutes within hedge fund strategies, including short equity strategies as well as long-biased funds, absolute return, global macro and commodity trading advisers.

Institutional investors are “on a quest for diversification given market conditions, but it will be harder going forward in the 2020s, post-COVID, especially if inflation is higher,” Mr. Kreiselmaier said.

The same factors that sent the HFRI Fund Weighed Composite index down 5.8% in the year ended June 30 also likely contributed to the AUM declines for various hedge fund firms that participated in P&I’s survey, said Kenneth J. Heinz, president of HFR Inc., Chicago.

In contrast, the HFRI Composite index was up 27.5% in the year ended June 30, 2021.

Among the hedge fund firms with at least $10 billion in assets in P&I’s 2022 hedge fund manager universe, New York-based Schonfeld Strategic Advisors LLC had the largest growth in AUM at 71%, to total $13.8 billion as of June 30.

The growth propelled the firm to the 32nd spot in the hedge fund rankings from 51 in 2021 when the firm’s growth was up 46.1% to $8.1 billion.

Ryan Tolkin, the firm’s CEO and CIO, said the multistrategy firm in the past year has expanded its organic capacity by adding 20 new partners and dozens of fund analysts, technologists and operations experts as well as developing long-term partnerships with external trading teams.

The firm’s employee base now totals 820 people in multiple offices around the world to accommodate 110 portfolio management teams and other employees.

“Our strong growth has been fueled by opportunity across markets over the year ended June 30,” Mr. Tolkin said.

The firm manages multiple hedge fund strategies within four broad categories — quantitative, fundamental equity, tactical trading, and combined discretionary macro and fixed income.

Within the broad strategy areas, Schonfeld’s strategies range from long/short equity, tactical trading, systematic, event-driven, risk and volatility arbitrage, discretionary macro, commodities and other approaches.

The firm continues to “increase the strategies it offers seeking diversity across regions and markets from offices in the U.S., Asia, Australia, the Middle East, Europe and the Americas,” Mr. Tolkin said.

The firm also is increasing its institutional investor base, said Mr. Tolkin, noting that the company works closely with clients offering transparent relationships because “we want our clients to understand what we do.”

About three-quarters of Schonfeld’s AUM is institutional.

Other $10 billion-plus hedge fund firms with strong asset growth in P&I’s universe includes Balyasny Asset Management LLC, Chicago, up 60% in the year ended June 30. That pushed the multistrategy firm to the 27th spot in P&I’s ranking with $16 billion in assets from the 39th spot a year ago.

In written comments, Anita Nassar, partner and senior managing director, said “Balyasny’s goal is to empower our LPs to be the best investors they can be. We partner with our investors in a way that ensures transparency, alignment of interest and long-term objectives which has contributed to our growth.”

She added “to this end, we encourage a lengthy due diligence process and investors are given access to our risk analytics, investment process and data intelligence.”

Miami-based tail-risk specialist Universa Investments LP, moved up to No. 24 in the ranking with AUM of $19.1 billion, up 54.4% from the 32nd spot in 2021.

Brandon Yarckin, chief operating officer, said in an interview that the firm’s growth was driven by a “significant majority of new investors,” noting that “Universa shines when markets get really bad. Pension funds get really nervous when markets are like this. We give them more security and we help investors put a higher focus on risk and drawdowns.”

London-based Man Group PLC saw its worldwide AUM managed in hedge funds rise 15.9% to $73.5 billion as of June 30.

“If you look at the past 12 months ended June 30, institutional investor demand focused on a mix of strong strategies, especially quantitative macro and equity market-neutral strategies, which did well in tough markets. Net inflows also went into absolute strategies. There were big moves into commodities and currencies in the face of rising inflation” during the time frame, said Mark Jones, deputy CEO, in an interview.

On the bright side, Mr. Jones said market conditions are creating more dispersion between companies, which provides more investment opportunities for hedge fund managers.

Worldwide assets managed in hedge funds by AQR Capital Management LLC, Greenwich, Conn. as of June 30 totaled $28.2 billion up 8% from June 30 the prior year,

While AQR’s hedge fund AUM growth was comparatively modest vs. other large hedge fund firms in P&I’s ranking, the company’s “multistrategy and stock selection strategies saw very strong performance with our overweight of the value factor in equities a significant contributor to their outperformance over peers and traditional markets,” said Suzanne Escousse, principal and chief marketing officer, in written comments.

“Our trend-following and global macro strategies also performed strongly thanks to an overall environment of trends across asset classes, increased inflation concerns and a rapid shift to tightening monetary policy,” she added.

With equities in a sustained downturn and bonds currently offering little to no diversification, Ms. Escousse said “we’ve seen renewed interest from institutions in strategies offering diversifying sources of return,” especially for multistrategy, value-oriented equity market-neutral, long-short equity and trend-following approaches like managed futures.

Year to date through June 30, AQR’s Managed Futures Full Volatility strategy returned a net 53.3%; Equity Market Neutral Global Value strategy returned a net 35.4%; and Absolute Return strategy returned a net 29.4%, according to data from AQR.

None of the $10 billion-plus hedge fund managers in P&I’s hedge fund manager ranking for 2022 that experienced the largest asset declines responded to requests for comment.

Lone Pine Capital LLC, Greenwich, Conn., experienced a precipitous decline of 50.9% to $5.4 billion in the year ended June 30. The firm declined to comment, but in a July letter to clients obtained by Bloomberg, the firm said “while this phase of latest period of underperformance has been difficult, we believe the work we are doing today will set us up to reap the rewards in the months and years to come.”

The letter said the hedge fund’s AUM declined 41.1% between September 2021 and June 2022.

Bloomberg contributed to this story.