Hedge Funds

hedge fund trader

The hedge fund industry has not been immune to the coronavirus-fueled stock selloff, with Hedge Fund Research's global index falling 4.51% through the first two weeks of March.
Some strategies have survived though, or even made money, HFR said. The firm's Systematic Diversified CTA index was up 0.58% at the end of Friday.
Equity hedge funds have gotten crushed — HFR's overall equity index is down 9% this month, and the one tracking funds that invest in growth stocks is down 16.78%.
Visit Business Insider's homepage for more stories.

The coronavirus-fueled stock selloff has not spared big names like Ray Dalio, but there are some hedge fund strategies that have seen upside.

Industry tracker Hedge Fund Research sent an update on returns through the first two weeks of the month — when the S&P 500 dropped more than 16% — that shows most hedge funds have not been hit as hard as the overall market, but are still on the downswing.

HFR's global index of all the funds it tracks lost 4.51% through the first two weeks of March, and is down 5.50% for the year. Equity hedge funds have been hit hardest among HFR's indices, with the firm's total equity fund index dropping 9% in the month of March so far (this does not include Monday's massive selloff).

Funds focused on growth, or momentum, stocks have been slammed, according to HFR. That index was down 16.78% through the first two weeks of this month, while value, the investing theory espoused by Seth Klarman and others, is down 5.46% this month, and 8.92% for the year.

At Cliff Asness' AQR, several of the firm's liquid-alternative mutual funds have lost double-digits this year so far, giving a glimpse into how some of its hedge-fund strategies are faring.

Billionaire Lee Ainslie, the founder of equity-focused Tiger Cub Maverick Capital, recently told investors that his plan is to "take advantage of the panic" and buy stocks of companies at a discount, in line with how value investors think about the markets.

Macro managers like Brevan Howard and Greg Coffey's Kirkoswald were the winners last month, notching positive returns while the markets experienced its first round of volatility related to the novel coronavirus pandemic. The overall industry's returns, tracked by HFR, show that these funds have managed well this month as well.

The overall macro/CTA index was down less than 1% through the month, and systematic diversified commodity-trading advisors were even positive over the last two weeks, at 0.58%, and for the year, with 0.26% returns. Quant CTA manager Quest Partners, a $1.5 billion firm based in New York, is an example of a fund riding high — the firm's flagship fund, the $1.4 billion AlphaQuest Original, was up 8.7% through the first two weeks of March, and 17.4% through the end of the year.

Quest's short-biased fund, which targets stocks in the S&P 500 with high amounts of beta, is up 21.47% for March through last Friday, and more than 40% for the year.

Join the conversation about this story »

NOW WATCH: Pathologists debunk 13 myths about the coronavirus, including why masks won't help

citadel ken griffin 2x1

Billionaire Citadel founder Ken Griffin has built one of the most well-known brands in hedge-fund history, and those who have worked for him have benefitted.
A Business Insider review has found dozens of funds started by an alum of Citadel or connected to Griffin in some way.
While Griffin isn't in the business of seeding top producers in the way Tiger Management founder Julian Robertson or George Soros were, Citadel's pod structure gives portfolio managers the chance to run a team.
In recent years, when new hedge funds have struggled to launch, some of the biggest start-ups have come from Citadel, including Woodline Capital, Cinctive Capital, and Candlestick Capital.
"Great firms drop the seeds of future success stories," Griffin said at an Economic Club of New York event in February.
Visit BI Prime for more Wall Street stories.

Ken Griffin modeled Citadel after Goldman Sachs' old-school analyst program. And, just like Goldman, when employees leave Citadel, they have a leg up in the industry.

While Tiger Management founder Julian Robertson remains the gold standard for hedge-fund networks, the hedge funds with connections to Griffin's Citadel are growing in both number and prominence.

A review of LinkedIn, past media, and industry sources led Business Insider to pull together a list of roughly 80 funds that were founded by someone who worked at Citadel or by someone who worked at a fund run by a Citadel alum. The research showed that roughly an eighth of the funds on the list are running more than $1 billion.

Well-known funds like Alec Litowitz's Magnetar Capital and Anand Parekh's Alyeska Investment Management highlight the generation of Citadel alums to first come about. Recently, some of the industry's biggest launches have been former Citadel heavy-hitters like Jack Woodruff's Candlestick Capital, Brandon Haley's Holocene Advisors, and Mike Rockefeller and Karl Kroeker's Woodline Capital.

While Cinctive Capital's founders are best known for their old fund Diamondback, Richard Schimel also led Citadel's now-shuttered Aptigon unit for a couple years.

This year, we have already reported on Prashanth Jayaram, a former healthcare portfolio manager who worked at Citadel and Tiger Cub Maverick Capital, who is launching his fund Tri Locum Partners.

A majority of the list has launched since the financial crisis, when Citadel lost $8 billion in assets and was in danger of closing (Griffin told The Wall Street Journal in 2015 that it took the firm three years and 17 days to earn back the losses).

Since then, the firm has added billions in assets, built out new teams and businesses, and cemented its status as one of the marquee names in the hedge fund industry with $30 billion in AUM. The firm's flagship Wellington fund has an annualized return of 18.7% since its launch nearly 30 years ago, and there are 950 investment professionals on more than 100 teams for the Chicago-based firm.

"Citadel has always focused on attracting and developing the world's top investment talent, and making significant investments in tools and resources to provide them with a platform where they will be most successful. Over the years, a handful of our successful portfolio managers have leveraged what they honed at the firm and decided to launch their own firm," the firm said in a statement provided to Business Insider.

Unlike Tiger, where many of the hedge funds launched by Robertson's disciples traded like him, Citadel's multi-strategy structure means spin-offs invest across the board.

Jonathan Graham's Aquatic Capital Management is a quant fund, while Renee Yao's Neo Ivy Capital uses machine-learning to trade equities globally (Yao did not manage money for Citadel during her time there). Matthew Smith, who was included on Sohn's rising stars list, founded his energy-focused hedge fund Deep Basin Capital in 2015 after working as an energy PM for Griffin.

The list of names includes people that made it to the highest ranks of Citadel as well as though who were only analysts before jumping to another fund or deciding to try and launch their own with limited experience. Michael Cowley founded Sandbar Asset Management in London after working as a portfolio manager for Izzy Englander's Millennium but was also an analyst at Citadel in the mid-2000s. Rushin Shah was at Citadel for less than two years before he founded Nine27 Capital Management at the beginning of this year.

Roughly half of the list of alums were portfolio managers or heads of businesses at Citadel before launching their own fund, while the other half were analysts, researchers, and developers who often went to another hedge fund before setting out on their own.

Not all alums have left in good standing. Citadel sued Misha Malyshev roughly a decade ago for stealing the firm's IP to start his own high-frequency trading firm, Teza Technologies, and a court fined Malyshev $1.1 million.

At one point, Citadel ran a seeding platform, known as PioneerPath that managers like Clint Murray's Lodge Hill Capital and Todd Cantor's Encompass Capital came from. But it was short-lived, lasting roughly two years from 2008 to 2010, before becoming a part of Surveyor, one of Citadel's three equities businesses.

Griffin himself is not in the business of backing many launches either. Most of his personal money is invested in Citadel funds, though he did back Woodruff last year. Citadel, as a firm, has no money invested in outside hedge funds either.

Talking at an Economic Club of New York event last month, Griffin said he was proud of the fact so many people from Citadel are running their own shops. While the 30-year-old hedge fund always wants to keep its top talent, Griffin is proud people can "stand on their own two feet" after leaving Citadel.

"Great firms drop the seeds of future success stories," he said in a conversation with Goldman Sachs President John Waldron.

Search Griffin's quickly expanding web

Join the conversation about this story »

NOW WATCH: Why bidets are better than buying countless rolls of toilet paper

Ray Dalio

Bridgewater's All Weather fund is down 14% and the Pure Alpha fund is down 21% as of the end of Monday, according to a note billionaire founder Ray Dalio sent to investors this morning. He said "while it's not what I would want, it's consistent with what I would have expected under the circumstances."
Dalio in the note points out how the firm was down 20% in September 2008, before making money by the end of the year.
Pure Alpha was flat last year while All Weather made nearly 20%.
Visit Business Insider's homepage for more stories.

Ray Dalio isn't happy with the performance of his Pure Alpha and All Weather funds in light of the sell-off due to the novel coronavirus sell-off, but he isn't surprised.

The billionaire founder of $160 billion hedge fund firm Bridgewater told investors this morning in a note that "while it's not what I would want, it's consistent with what I would have expected under the circumstances." His Pure Alpha fund is down roughly 21% as of the end of day Monday, and the more measured All Weather fund is down roughly 14%.

In a two-page note to investors, Dalio said that the firm initially thought the virus was similar to other global risks that they had built into their programs, like an earthquake or a war with Iran.

"For those sorts of big potential risks or others we can't even imagine, we have controls that are intended to limit our losses to tolerable amounts," he wrote. "In this case the risk control process worked as designed. As a result, our losses have been similar to those in our prior worst-performing periods."

The big winners in the hedge fund space include commodity and macro players, as well as volatility managers. In the equity space, value managers have outperformed growth funds so far. Bridgewater has been the most high-profile of managers to suffer serious losses, as many other large multi-strategy firms, like Citadel and Point72, and quants, like Renaissance Technologies, have remained roughly flat or suffered more muted losses.

Dalio reminded investors that the firm was down 20% in September of 2008, before making money for the year, and wrote that the firm has "maintained our liquidity to be able to adjust the portfolio in response to changing conditions."

The firm used a similar playbook to its 2008 game plan, with a focus on interest rates and a floor of 0% rates.

"For example, eight years before the 2008 financial crisis our study of the Great Depression led us to understand the mechanics of hitting 0% interest rates in an economic downturn, which led us to build a 'Depression Gauge' so that when rates hit 0% in 2008 we had it in our systems and we stuck to it and it helped us a lot," he wrote.

"Similarly the game plan that we had going into this coronavirus crisis used indicators to trigger our defensive moves
in a downturn toward a 0% interest rate floor. It also included holding options positions designed to limit our losses
in the worst-case scenario regardless of the cause."

Toward the end of the note, Dalio warned about a world with negative interest rates, "a global wealth gap, and populism."

"It is one we have been preparing for a long time. I will soon send you my research about this. We do think that we have an edge in knowing how to invest in this environment. Right now we are deep at work, looking at the implications in detail," he wrote.

Bridgewater declined to comment further.

Join the conversation about this story »

NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.

bill ackman

Bill Ackman warned on Wednesday of mass casualties, collapsing industries, and a deep recession if the US government doesn't impose a nationwide shutdown to slow the spread of the coronavirus.
The billionaire hedge-fund manager's emotional half-hour CNBC interview pushed an already vulnerable stock market toward intraday lows.
Ackman also revealed that he was buying shares, sparking accusations that he was manipulating the market to drive stock prices down or profit from short bets.
We've compiled a list of the Pershing Square Capital chief's most striking comments below.
Visit Business Insider's homepage for more stories.

The billionaire hedge-fund manager Bill Ackman predicted on Wednesday that millions of Americans would die, industries would collapse, and the US economy would tumble into a deep recession unless there's a 30-day nationwide shutdown to slow the spread of the coronavirus.

The Pershing Square Capital chief's dire warnings in an emotional half-hour CNBC interview pushed a vulnerable stock market to intraday lows.

The Dow Jones industrial average— already down more than 1,000 points when Ackman came on air — quickly hit a circuit breaker that halted trading for 15 minutes after S&P 500 losses reached 7%. The Dow reopened more than 2,000 points down, according to Forbes.

Ackman revealed during the interview that he was buying shares in Hilton, Starbucks, and Restaurant Brands International, which owns Burger King. The disconnect between his grave predictions and his stock purchases sparked accusations that he was trying to scare investors into selling so he could buy at a discount or profit from short bets. Market commentators also accused him of fearmongering and argued that a monthlong break wasn't feasible.

The backlash led Ackman to clarify his position in a tweet: "I am confident the president will do the right thing in temporarily shutting down the country and closing the borders.

"If that happens, we can win the war against the virus and the markets and the economy will soar," he added.

Here's a roundup of Ackman's most striking comments from his CNBC interview:

1. "My colleagues at work thought I was a lunatic."— on his preparations for the pandemic, which included withdrawing a large amount of cash from an ATM.

2. "Hell is coming."— the warning Ackman gave to the CEOs of his portfolio companies.

3. "There's a tsunami coming."— commenting on many Americans being ignorant of the threat.

4. "We will go through a Depression-era period in this country, and millions of people will die around the globe. As many as a million Americans will die."— describing the scale of the coronavirus threat.

5. "Thirty-day spring break, America"— referring to his proposal that the government shut down the country for a month and cover people's rents and mortgages, waive taxes, and help with other expenses.

6. "Capitalism does not work in an 18-month shutdown; capitalism can work in a 30-day shutdown."— explaining why short-term economic disruption is preferable.

7. "If he can save the country from the coronavirus, he can get reelected."— outlining why President Donald Trump should be motivated to take action.

8. "Hilton is the canary in the coal mine. It's going to zero, along with every other hotel company."— predicting the fate of one of Pershing's biggest holdings if the coronavirus outbreak isn't stopped.

9. "He's not saying to storm the beaches at Normandy. He's saying go home, spend a month with your family."— arguing that an announcement of a national shutdown from Trump wouldn't be that big a deal.

10. "How do we kill it? Everyone just goes home. Sit on the couch. You watch Netflix, you order in Chipotle, and you stay there for a month."— explaining his plan to stop the spread of the coronavirus and what it would involve.

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

ray dalio

Quant funds have been slammed over the last couple of days, with big names like Bridgewater, Schonfeld, and Renaissance taking a hit.
Several quant investors told Business Insider that it's worse than 2007, when the infamous "Quant Quake" steamrolled even the most savvy of funds.
"Of course we are questioning if we should have done things differently," Bridgewater founder Ray Dalio wrote in a note to investors.
Click here for more BI Prime stories.

For long-running quant funds, their financial crisis happened in 2007, not 2008.

The "Quant Quake" decimated prestigious computer-investing units like Goldman Sachs' Quantitative Investment Strategies, and, according to the FT's 10-year anniversary piece on the event, "scarred a generation of financial scientists on Wall Street."

The last seven days, quant investors and industry observers say, have been worse — or, at least, have felt worse.

The biggest hedge fund in the world, Ray Dalio's Bridgewater, has fallen by double-digits in its main funds, Pure Alpha and All Weather, which have lost 21% and 14% since the beginning of the year, respectively.

Dalio said in a note to clients on Wednesday that the firm considered overriding its systems before the outbreak of the novel coronavirus, but decided not to because "we knew we didn't have an edge trading based on our views of the virus and because the range of possible outcomes was so huge."

"Of course we are questioning if we should have done things differently," he said.

Dalio is not the only one down, though.

Schonfeld Strategic Advisors is down more than 10% on the month as of this week in its Partners Fund, which combines fundamental stock-pickers with the firm's quant strategies, sources say. A source familiar with the situation said the firm, which traditionally does not update investors on inter-month performance, held a call yesterday with investors to inform them, but had a slight bounce-back today and is committed to the quant strategies.

Through March 13, Renaissance Technologies $6.6 billion Institutional Equities fund is down 5.5% for the month and 12% for the year, a source said. Point72's Cubist is down 2.7% for the year, sources say, while WorldQuant is down 3%.

The funds declined to comment.

The issue, of course, has been the pandemic caused by the novel coronavirus, which has introduced record-levels of volatility to the public equity markets and forced central banks to slash interest rates. Highly leveraged quant funds have had trouble adapting their models quickly enough, several sources say, and have been shedding holdings quickly. The selloff was then amplified by the different levels of leverage funds had.

The big difference between now and 2007, industry sources say, is quant funds have a much larger portion of the market; about a year and a half ago, quant hedge fund assets surged past $1 trillion— making up just under a third of total assets in the space. In the FT's look-back at 2007 written three years ago, analysts worried about exactly that.

"What is going on now is not just the growth of quant hedge funds, like before the crisis. Now it's system-wide across the investment world. In 2007 it was localized because no one else was pursuing these strategies. Now everyone is," Richard Bookstaber told the paper. Bookstaber previously worked at Moore Capital and Morgan Stanley, and is currently the chief risk officer for the University of California pension.

The biggest hedge funds in the industry rely on systematic models, such as Bridgewater, AQR, and Two Sigma, but a research report from Barclays in 2019 even found that quant strategies were paving the way for "super managers" because large, multi-strategy funds began incorporating more quant practices in their discretionary books.

Headhunters don't expect the quant skillset to become any less desired though, even if there is a big drop in assets. Hedge funds have been battling Silicon Valley for this type of talent for years now, and believe in it, says Vickram Tandon, founder of A-Squared Search.

"Yes, the process has slowed down, but that doesn't mean there's not still action happening," he said, noting he had been sent two resumes Wednesday morning.

"It's like the summer, but it's not dead."

Join the conversation about this story »

NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.

Michael Platt

Billionaire Michael Platt's BlueCrest Capital cut at least 10 portfolio managers after the firm was slammed by losses in its relative-value book last week, sources tell Business Insider.
BlueCrest was not the only hedge fund hit hard by this type of trade, which seeks to take advantage of differences in similar types of securities. Funds like Citadel, ExodusPoint, and Millennium also suffered losses due to relative-value trades.
Many of the firms were caught out in a type of relative-value wager known as a basis trade, where traders bet on the difference in price between Treasuries and futures.
Citadel's flagship fund Wellington is down 3% for the month as of the end of last week, while ExodusPoint reportedly lost 4% last week.
Visit Business Insider's homepage for more stories.

Billionaire Michael Platt's BlueCrest Capital Management has cut at least 10 portfolio managers after the firm suffered losses in its fixed-income relative value strategy, sources tell Business Insider.

The firm pulled back from the strategy last week, according to Bloomberg, which reported that two traders, Romain Denis and Raymond Wang, had left the firm. Business Insider has learned of additional departures that take the total to at least 10, which haven't been previously reported.

The firm, which notched 50% returns last year, was up for the year as of last Wednesday, according to Bloomberg.

A source familiar with the firm said the manager is positive year-to-date, and has 130 portfolio managers currently.

Relative-value trades seek to take advantage of price discrepancies between similar securities, and are often applied to fixed income and equities markets, but can also be used in commodities markets as well.

The pandemic caused by the novel coronavirus has added never-before-seen volatility to the equity markets, and forced the Fed to slash rates to zero last weekend. The fixed-income market has been turned upside down as 10-year rates hit record lows, and hedge funds ended up taking heavy losses.

Several funds — such as Citadel, ExodusPoint, and Millennium — suffered losses last week in these types of trades as volatile markets whipped security prices up and down. They all got caught in a type of relative-value trade known as a basis trade, where traders bet on the difference in price between Treasuries and futures.

Citadel, the $30 billion hedge fund firm founded by billionaire Ken Griffin, took a hit on relative-value bets last week that helped wipe out some of its overall gains for the year, three people familiar with the firm's performance told Business Insider. The Wall Street Journal reported that the losses were in the hundreds of millions midway through last week.

The losses mean Citadel is down 3% so far in March as of the end of last week in the firm's flagship fund Wellington, three of the people said.

The firm's global-fixed income book is also flat for the year as of the end of the day Monday, a person familiar with the situation told Business Insider, and Wellington is up slightly for the year. The person said that the losses were unrealized, and that most of the losses have been pared back this week.

Fellow multi-strategy manager ExodusPoint dropped 4% last week thanks to similar relative value trades, according to Bloomberg, and Izzy Englander's Millennium, shut down numerous trading teams after they suffered losses, according to the FT.

Citadel however clearly sees an opportunity in the market, as the firm is raising money for a fixed-income relative value fund that it registered with regulatory bodies this week.

Citadel declined to comment.

The US stock market is now in bear market territory after slumping more than 30% from the highs of the year on fears the coronavirus will bring economic life to a standstill. The Dow Jones Industrial Average on Wednesday plunged below its closing level at President Donald Trump's inauguration, nearly wiping out all gains made during his presidency.

Hedge funds have not been immune to the selloff, with heavy-hitters like Bridgewater's massive All Weather and Pure Alpha funds down double-digits so far this year.

But not all strategies are taking a hit. CTAs, which speculate on futures, are soaring. So are macro funds. Still, the average hedge fund has lost 5.5% for the year through the first two weeks of March, according to Hedge Fund Research.

Join the conversation about this story »

NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.

coronavirus stocks

Massar Capital, a $233 million hedge fund founded by Marwan Younes, finished Monday up more than 14% for the year. Massar makes global commodities and macro bets, according to its website.
Younes said the firm has been able to thrive in the chaotic markets caused by the novel coronavirus because of his background: He grew up in Beirut during the Lebanese civil war of the 1980s.
"This background naturally shapes one's outlook to be highly defensive, based first on maximizing the odds of survivability, instead of the natural impulse to maximize profits," Younes wrote in a message to investors on Tuesday.
Visit Business Insider's homepage for more stories.

For many traders and money managers, the past month of market volatility and panic has been a flashback to the most hectic times of their careers — the 2008 financial crisis.

But for Marwan Younes, the founder of $233 million macro fund Massar Capital, he's using his experience growing up in a war zone to keep calm during the stormy markets.

"Growing up in Beirut during the Lebanese civil war in the 1980s meant regular disruptions to daily life, with running water and electricity an unpredictable luxury, while lockdowns and school cancellations were frequent at times of intense bombing. As it happens, that skepticism in orderly behavior was further reinforced early in my professional trading career as a portfolio manager, allowing me to successfully navigate through the 2008 financial crisis," Younes wrote in a note to investors on Tuesday.

"This background naturally shapes one's outlook to be highly defensive, based first on maximizing the odds of survivability, instead of the natural impulse to maximize profits."

It's paid off, as Massar is up more than 14% as of the end of the day Monday, and finished last year up more than 23%. The firm focuses on commodities, an area where some hedge funds have done well through this market turmoil.

Still, the average hedge fund has fallen more than 5% for the year, and big quants like Schonfeld and Bridgewater are feeling pain reminiscent of the 2007 "quant quake".

Younes gave investors updates on how the firm was thinking about investing and continuing to operate throughout the pandemic caused by the novel coronavirus. On the operations side the firm has invested in cloud-based infrastructure to make sure it can continue working during government-mandated shutdowns.

On the investing side, he wrote that the firm has maintained its "net bearish stance" on oil. He expects "lower energy prices to infect high yield, further pressuring equity markets in a negative feedback loop."

"We are in unprecedented times, and the conventional tools to quell the market's volatility are showing their limits. We expect this trading environment to continue," he wrote.

Join the conversation about this story »

NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.

FILE PHOTO - William Ackman, chief executive of Pershing Square walks on the floor of the New York Stock Exchange, New York, U.S. on November 10, 2015. REUTERS/Brendan McDermid/File Photo

The hedge-fund billionaire Bill Ackman turned a $27 million position into a $2.6 billion windfall as the coronavirus outbreak dragged stocks to multiyear lows and threatened deep economic recession.
Pershing Square Capital Management turned to credit protection on investment-grade and high-yield bond indexes to bet on an increased risk of corporate default.
The multibillion-dollar profit offset losses elsewhere in Ackman's portfolio and drove a 7.9% gain in March through Tuesday's close for Pershing Square's public fund, The Wall Street Journal reported.
The fund has since used its profits to bolster bets on Berkshire Hathaway, Hilton, Lowe's, Restaurant Brands International, and Agilent.
Visit the Business Insider homepage for more stories.

Pershing Square Capital Management CEO Bill Ackman minted a multibillion-dollar profit as coronavirus fears tanked US stocks.

The hedge-fund billionaire turned a $27 million position into $2.6 billion through defensive hedge bets, a Wednesday letter to investors said. The profit offset losses elsewhere in the firm's portfolio and helped Ackman's public fund land a 7.9% gain in March through Tuesday's close, The Wall Street Journal reported. The S&P 500 slid 17% over the same period.

Pershing Square used credit protection on investment-grade and high-yield bond indexes to land the massive profits. The assets rise in value as the odds of corporate defaults increase. As measures to combat the virus outbreak cut into economic activity, corporate bond ratings tanked, and investors feared the worst.

The fund was able to purchase the investment vehicles about a month ago "at near-all-time tight levels of credit spreads," so the risk of loss was "minimal at the time of purchase," Ackman wrote.

The hedge fund began liquidating its protective bets last week after unprecedented action from the Federal Reserve and the Treasury Department shifted sentiment toward corporate credit health. Ackman fully exited the position on Monday, the same day the US central bank announced it would begin buying corporate bonds to prop up the battered market.

Ackman has since used the profits to bolster Pershing Square's investments in Berkshire Hathaway, Hilton, Lowe's, Restaurant Brands International, and Agilent. The fund also reestablished a stake in Starbucks after selling its position in January.

The fund founder used Twitter and an appearance on CNBC last week to predict that the coronavirus outbreak would cause economic turmoil if the US didn't institute a 30-day shutdown.

Ackman urged CEOs of his portfolio companies to take precautions as "hell is coming" and said a national stay-at-home order was "the only answer" for saving the economy. Markets slid further through the March 18 session during Ackman's emotional CNBC interview.

After commentators accused him of fearmongering and intentionally driving markets lower, the investor said that he was "confident the president will do the right thing."

Ackman said in his Wednesday letter that he still believes a monthlong shutdown is necessary and that the US "can be reopened carefully as China has so far successfully done" once the lockdown is over.

Now read more markets coverage from Markets Insider and Business Insider:

Senate passes $2 trillion coronavirus relief bill, which includes checks for Americans and small business loans

Goldman Sachs: 4 key differences make the coronavirus-fueled bear market more worrisome than past slumps

Irreverent Reddit forum Wall Street Bets is hosting a live trading event in the hopes of cashing in on the success of esports

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

coronavirus stocks

Launching a hedge fund has gotten tougher every year, but the coronavirus pandemic has significantly slowed down many fundraising conversations, industry observers say.
New managers with name recognitions or institutional backing are also fighting in the battle for assets with firms like Baupost and D.E. Shaw, both of which re-opened funds to new capital, as well as hedge-fund-like strategies, like liquid alternatives, which come at a cheaper price and offer better liquidity.
Still, there are people setting out on their own, and strategies that make sense in the current environment are being expedited by fundraisers, such as distressed credit funds.
Click here for more BI Prime stories.

Hedge fund closures have been outnumbering launches the last couple of years, and the pandemic caused by the novel coronavirus will only speed up that trend.

With allocators' portfolios hit hard and the markets as choppy as they have ever been, both hedge-fund investors and money managers looking to start their own fund are slow to dive into something new right now.

"People's perspectives are about 12 inches in front of them at this point," said Andrew Saunders, president of Castle Hill Capital Partners and head of the firm's capital introduction services.

"Conversations that have been percolating for months have ground to halt, and it makes sense."

Despite the uphill battle to launch a fund now, there have been well-pedigreed investors who have announced their intentions to go it alone. Business Insider has reported on Viking's former co-CIO Ben Jacobs readying a new firm called Anomaly Capital to launch in the second half of 2020, and former Citadel healthcare portfolio manager Prashanth Jayaram is building out a fund called Tri Locum Partners for later this year.

Industry publications like Hedge Fund Alert have also reported on new-funds-in-progress like Man Group's former head of North American equities John Gisondi's new firm and Balyasny energy investor Christian Zann's start-up. LinkedIn shows that former Ziff Capital Partners CIO Gary Stern started Eagle Health Investments in January, and former Senator partner Michael Simanovsky announced his new firm, Cambiar Asset Management, in February. Stern and Simanovsky did not respond to requests for comment.

But these new managers have many layers of obstacles in their way to raise money and attract talent, none more pressing than the novel coronavirus pandemic, which has canceled capital introduction conferences put on by banks' prime brokerages and sent unemployment claims skyrocketing — making those with a stable position think twice before leaving for a start-up.

In addition, well-followed funds like Seth Klarman's Baupost Group and D.E. Shaw have re-opened to capital, and Citadel is raising money for a new relative-value fund. Money managers offering liquid alternatives products also foresee an opening into investors' portfolios, possibly at the expense of hedge funds, due to the liquidity benefits offered by ETFs or mutual funds.

"It certainly doesn't hurt to have certain types of liquid products in your portfolio that can help dampen or weather these types of markets," said Chris Hempstead, who was recently hired by New York Life Investment Management to build out the pipeline of institutional investors for the firm's liquid alternatives ETF line, IndexIQ.

"Our cautious estimate is that demand will remain in-line" with expectations, with the hopes it will accelerate in the institutional channel.

Saunders said that the slowdown means adding "six months" to whatever a new manager's expectations were for starting. One investor, who asked to speak on the condition of anonymity because he doesn't know when he will put all of his investors' capital to work yet, was set to start trading at the beginning of the month but held out because of the shakiness of the market.

He has now begun to slowly build positions, but is still not all-in, and is grateful for not starting a couple weeks ago. "Better to be lucky than good," the person said.

At Chicago-based hedge-fund seeder Borealis Strategic Capital, business has slowed down, but is still in the range of what the five-person investment firm would consider normal, managing director Scott Schweighauser said. Since the firm started working remotely last Monday, they've held "a dozen or so" intro calls with prospective managers.

The firm isn't shying away from backing new managers right now, thanks to a review they did of performance figures following the 2008 housing crisis. The firm found that newly launched managers' returns "were pretty promising" mostly because they had "unencumbered" portfolios that could shift quickly if needed.

"We're more eager to get money put to work," Schweighauser said.

Borealis is closing to signing a seed deal with a distressed credit fund manager that planned to launch October 1. Now, the firm is trying to get the manager to push the start date up a month or two, with the expectations opportunities are coming for that strategy.

"We are guardedly optimistic."

Join the conversation about this story »

NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.

bill ackman

Bill Ackman addressed claims that he fanned fears of the novel coronavirus to benefit his hedge fund in a letter to investors on Thursday.
The billionaire boss of Pershing Square Capital Management — which turned $27 million in hedges into $2.6 billion during the recent market sell-off — warned of mass casualties, industries collapsing, and a deep recession in an emotional CNBC interview last week.
However, Ackman said in the letter that the hedges didn't post further gains from the interview.
He also argued that he disclosed his bullish turn in sentiment and Pershing Square's purchases of Hilton, Starbucks, and other stocks.
Visit Business Insider's homepage for more stories.

Billionaire Bill Ackman defended himself in a letter to investors on Thursday, dismissing accusations that he turned $27 million in hedges into $2.6 billion by cynically stoking fears about the novel coronavirus last week in order to tank financial markets.

The Pershing Square Capital Management chief addressed the claims by detailing when and why the hedge fund made its moves. In February, it purchased credit default swaps — which insure the buyer against an asset defaulting — on investment-grade and high-yield credit default swap indexes.

Ackman noted that the investment-grade indexes were trading near their all-time tight levels, at about 50 basis points a year, and the high-yield indexes were trading close to their lowest spreads ever. Pershing bought the swaps because he expected them to rise in value as sweeping lockdowns in response to coronavirus widened credit spreads and reduced stock prices, he said.

The ensuing market sell-off did widen spreads, driving up the value of the credit default swaps to about $1.8 billion by March 9. They were worth $2.75 billion by March 12, Ackman said, prompting Pershing Square to begin selling a portion daily — they weren't as attractive with larger spreads and accounted for almost 40% of the fund's capital by then.

Ackman took to Twitter on March 18, calling on President Donald Trump to shut down the US and impose an "extended Spring Break" to slow the spread of coronavirus. By the time of his CNBC interview later that day, Pershing Square had sold just over half of its hedges for a $1.3 billion profit, and the balance was sold for another $1.3 billion over the next three trading days, Ackman said in the letter.

During the emotional interview, Ackman warned that failure to shut down the country would result in massive casualties, industries collapsing, and a deep recession.

"We will go through a Depression-era period in this country, and millions of people will die around the globe," he said. "As many as a million Americans will die."

Despite his dire warnings, Ackman argued in the letter that he didn't mislead investors because he spoke about turning bullish and buying Hilton, Starbucks, and other stocks during the interview. He also highlighted his tweets later that day, in which he expressed confidence that the US government would lock down the nation, meaning "the markets and the economy will soar," and Pershing Square was snapping up potential "bargains of a lifetime."

Indeed, the fund was plowing $2.5 billion into equities at the time of Ackman's interview, he said in the letter. He added that its hedges didn't benefit from his appearance.

"Our hedge had already paid off prior to my going on CNBC," he said. "The hedge did not increase in value during or after I went on CNBC. It stayed at approximately the same value until we exited."

Ackman clarified that he was trying to convey two messages in his interview: Pershing Square was buying rather than selling, and the virus posed an enormous threat to the US that required immediate action.

"I had become bullish because of my belief that the entire country would soon go into lockdown, and that would be the fastest and best way to minimize the impact of the virus," he said. "That was why I explained that we were buying stocks."

"I also wanted to shout from the rooftops about the importance of taking the virus seriously so that we would build a consensus to lockdown the country as soon as possible," he added.

Ackman also downplayed the significance of the hedges to Pershing Square's bottom line. They only served to offset $2.6 billion in mark-to-market losses on its portfolio during the sell-off, he said.

Join the conversation about this story »

NOW WATCH: How running shoes can be recycled into ski boots

bill ackman

Billionaire investor Bill Ackman called on President Donald Trump to launch "the biggest infrastructure program of all time" to counteract the coronavirus slowdown in a tweet on Sunday.
Ackman's Pershing Square hedge fund raised its stake in Howard Hughes, a real estate developer, by $500 million on Friday.
Howard Hughes stands to benefit from an infrastructure boom as it could shore up real estate prices, boost the value of its developments by improving their accessibility, and lead to more funding from special districts.
Ackman defended himself last week against accusations that he sounded the alarm on the novel coronavirus in order to tank markets, as his fund's hedges made a $2.6 billion profit during the sell-off.
Visit Business Insider's homepage for more stories.

Billionaire investor Bill Ackman asked President Donald Trump on Sunday to spend trillions on infrastructure to offset the economic fallout from the novel coronavirus. Two days earlier, Ackman's Pershing Square hedge fund raised its stake in a real estate developer — which would likely benefit from an infrastructure boom — by $500 million.

"Mr. President, why don't you launch the biggest infrastructure program of all time now?" Ackman tweeted. "Roads, bridges, and other infrastructure involve outdoor work that allows for social distancing."

Rock-bottom interest rates, lower commodity prices, and less competition for labor would keep the government's costs down, he continued. Widespread lockdowns would also make construction less disruptive, he added.

"What better time is there to build roads, bridges and tunnels when traffic is way down?" Ackman asked.

Ackman made the suggestion two days after Pershing Square added to its stake in Howard Hughes, a real estate developer. Pershing told Howard Hughes that it planned to spend up to $500 million on its shares through a private placement, according to a Securities and Exchange filing, and Ackman confirmed the figure in a tweet on Friday.

Howard Hughes — and Pershing as one of its largest shareholders — stands to benefit from a surge in infrastructure spending in at least three ways:

A sweeping infrastructure program could boost the US economy, fueling demand for real estate and driving up property prices.
Howard Hughes' developments could rise in value if new highways and bridges improve their accessibility and transport links.
Special districts might receive a fresh influx of government cash, and use it to reimburse Howard Hughes and other developers for infrastructure improvements.

Pershing Square and Howard Hughes didn't immediately respond to a request for comment from Business Insider.

Ackman faced accusations last week that he issued dire warnings about the coronavirus in order to tank markets and help his hedges, which posted a $2.6 billion return in a matter of weeks.

The billionaire defended himself in a letter to investors and a raft of tweets. He emphasized that the hedges didn't gain in value after his emotional CNBC interview, and the windfall only balanced out the roughly 30% decline in Pershing Square's equity portfolio during the recent sell-off, leaving his fund roughly break-even for the year.

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

stocks volatility trading coronavirus

March was a month of pain for investors in market-tracking index funds and sophisticated quant hedge funds alike, as the coronavirus selloff knocked several hedge fund categories.
But some macro managers and commodity speculators thrived. One macro manager up double-digits told investors mid-month that his childhood spent in Lebanon's civil war helped prepare him for the markets.
The biggest names in the hedge fund space were tripped up earlier this month, but Millennium and Citadel were able to claw back their losses before the end of March.
Visit BI Prime for more Wall Street stories.

What a difference a month makes.

At the end of February, when the novel coronavirus still seemed a distant threat to many Americans, hedge funds weathered a dip in the global markets reasonably well, according to Hedge Fund Research, losing less than 2% on average while the stock market suffered much sharper declines.

Then coronavirus cases exploded in March both stateside and in European nations, crippling the global economy and forcing governments to close down businesses and borders. In this case, many hedge funds were not spared the pain.

Hedge Fund Research, in a rare occurrence, gave a mid-month update of the managers the data tracker reports on, and said that the average hedge fund fell 4.5% in the first two weeks of March.

Certain types of funds were hit harder, while others have been able to thrive in the volatile environment.

Here's a rundown of the winners, losers, and those in between in the $3.3 trillion industry.

Loser: Quants

The performance of some of the industry's largest quant managers has suffered even more since several in the industry told Business Insider that conditions felt worse than the "Quant Quake" of 2007.

Renaissance Technologies, the secretive shop started by billionaire Jim Simons, has dropped 18% this month in its main equities fund, Bloomberg reports, and is down 24% for the year. Steve Cohen's Cubist arm meanwhile has fallen 22% in the month, dragging the flagship fund for Point72 down.

Other quant-driven shops like Bridgewater and Schonfeld Strategic Advisors have also struggled.

Winner: Macro investors and CTAs

Brevan Howard and Caxton Associates are reportedly leading the way for macro managers, while Appaloosa alum Eric Cole has his Warlander Asset Management up roughly 20% for the year, sources say.

Marwan Younes, the founder of macro manager Massar Capital, told investors he was positioned well for the current environment because he grew up during the Lebanese civil war, which taught him to always be on the defensive

CTAs, which trade future contracts of commodities, have also soared during the market turmoil, with managers like Quest Partners putting up significant gains already for the year.

Loser: Fundamental stock-pickers

Ricky Sandler's Eminence Capital is down 30% on the year, sources tell Business Insider, and Hedge Fund Alert reports that Chris Hohn's TCI — which soared in 2019 — has fallen 30% this year as well.

Soroban Capital, according to Bloomberg, was down nearly 8% in February, before global markets tumbled further. Seth Klarman's Baupost was down 8% through the first two weeks of March as well, a rare stumble for the renowned value investor.

Billionaire Bill Ackman's Pershing Square however has made up for its losses in its portfolio with hedges betting on the markets tanking in the form of credit-default swaps, but has had to ward off criticism that he intentionally scared investors during a CNBC interview.

In-between: Big multi-strategy firms

Citadel, ExodusPoint, Point72, and Millennium have both clawed back their losses from earlier this month, Bloomberg reports, with ExodusPoint positive for the month as of March 20.

Citadel, Exodus, and Millennium were a part of the wave of managers hit with losses related to relative-value trades earlier this month. Michael Platt's BlueCrest cut at least 10 portfolio managers in relation to losses in similar trades, Business Insider reported.

Steve Cohen's Point72 meanwhile has had to deal with poor performance in its Cubist unit, and is down 4% for the month, as of March 20.

Winner: Hedge fund allocators

Yes, hedge funds have performed, on average, better than the overall market, but the real reason hedge-fund investors are winners is because some of the biggest funds in the industry are open to new capital for the first time in years.

Coatue, Citadel, D.E. Shaw, Schonfeld Strategic Advisors, and Baupost are all accepting new capital as funds hope to buy the dip.

While these big-name managers being open for new investment hurts managers trying to get off the ground, hedge-fund investors have a once-in-a-blue-moon opportunity to get in with the most well-known managers.

In-between: Credit funds

While rates plunging worldwide have not been a welcome change for many credit funds, for the first time in years there are new opportunities set to emerge for distressed credit investors.

Bruce Richard, the CEO of Marathon Asset Management, said during a Bloomberg TV interview that "this is the greatest credit dislocation since 2008, there's no doubt."

He said Marathon believes there's $1.2 trillion in distressed opportunities in the US right now — the total of 2008 and 2009 combined.

In the meantime, York Capital's European fund is down roughly 10% for the year, sources say, and the firm was already limiting redemptions from its Credit Opportunities fund before the year began, but credit funds haven't plunged to the same extent equity managers have.

stephen curry shoot

HSBC strategist Alastair Pinder identified a group of hedge funds that topped a global benchmark for three consecutive years and have also outperformed during the last few tumultuous weeks.
Pinder says there's evidence funds with that kind of track record will continue to win, and investors following their approach since 2012 would have handily beaten the market.
He also revealed the funds' top holdings in the US, Europe, emerging markets, and Japan.
Visit Business Insider's homepage for more stories.

For years, sports fans and investors have debated whether there is really such a thing as a "hot hand." That is, if a player or investor is performing very well, are they likely to keep up the streak?

Alastair Pinder, global equity strategist at HSBC, says he has an answer — at least for the investing world here and now. After evaluating data on more than 400 hedge funds, he says he's identified the tactics that have worked for the best global funds of recent years.

"At least from a short-term perspective we find that 'Hot Hand' funds can often continue their strong momentum and winning streaks," he wrote in a note to clients.

He's zeroed in on a group that not only beat the FTSE All-World Index every year from 2017 to 2019, but also outperformed during the turmoil that's afflicted markets since the coronavirus pandemic began.

"Our current subset of 'Hot Hand' funds have outperformed global equity markets by over 40% since 2012, or 4.8% on an annualized basis and have beaten the benchmark considerably over the last few weeks despite the turbulence," Pinder wrote.

Over that time, following those hot hands and investing in the countries or industries they liked best while shorting those they liked the least would have substantially beaten the market, he says. That makes them a particularly appealing source of ideas.

"Key contrarian ideas over the last three months by 'Hot Hand' funds have been to increase their active weight towards Semiconductors, Retailing and Energy, while cutting exposure to Capital Goods and Materials," Pinder said.

Investors can implement those ideas using ETFs like the VanEck Vectors Semiconductor ETF, SPDR S&P Retail ETF, and Vanguard Energy Index Fund.

The funds also overweight the US, China, and India compared to their benchmark, a strategy investors can implement with funds like the SPDR S&P 500 ETF, Xtrackers MSCI All China Equity ETF, and iShares MSCI India ETF. Perhaps not surprisingly, these funds bet big on tech and consumer discretionary stocks.

Pinder says the average fund in the hot hand group has 34% of its assets in tech stocks, which is double the fund's benchmark.

"On the other hand, they have are less convinced on UK equities as well as Canada and Japan. South Korea, Brazil and Russia are the EM markets in which 'Hot Hand' funds have a relatively small allocation," he wrote.

Pinder also combed through the holdings of the funds to find their biggest investments in several major regions. In the US, the hot hands top ten is made up of Microsoft, Amazon, Alphabet, Visa, Mastercard, UnitedHealth, Adobe, Thermo Fisher, Estee Lauder, and Facebook.

In Europe, their top bets were LVMH, Nestle, Partners Group, Novo Nordisk, L'Oréal, RELX, Adyen, Roche, Hermès, and Atlas Copco, and in emerging markets, their largest allocations went to Tencent, HDFC, Alibaba, TAL Education, Samsung, Ping An Insurance, Kotak Mahindra Bank, Kweichow Moutai, PT Bank Central Asia, and Taiwan Semiconductor.

In Japan, they favored Hoya, Pan Pacific International, Recruit Holdings, Daikin Industries, Tokio Marine, Hikari Tsushin, Nintendo, Nippon Telegraph & Telephone, Kao, and SMC Corp.

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

Ken Griffin

In a memo to employees of Griffin's $30 billion hedge fund, the billionaire wrote that the pandemic caused by the novel coronavirus is a "global health crisis."
Griffin, in a talk with Goldman Sachs president John Waldron in early February, said the coronavirus, which was then mostly in Asia, would spread across borders and "will be a challenge for the world
to navigate this over the course of the next several months."
The firm has managed the volatility in global markets, despite losing hundreds of millions in the middle of March due to relative-value trades gone wrong. The firm was up 1.2% for March and 5.7% for the year, despite equity markets suffering one of the worst first quarters on record.
Read the full memo below.
Visit Business Insider's homepage for more stories.

Billionaire Ken Griffin's memo to employees of his $30 billion hedge fund did not mince words.

The note, sent to Citadel employees last Friday, called the coronavirus pandemic "an unprecedented moment of global distress as the entire world faces this common invisible threat."

"Few of us have ever faced this level of uncertainty in our lifetimes, and the weight of a myriad of new demands will impact each of us differently. We will all have our moments," the memo reads.

Citadel has handled the volatility in financial markets well, despite getting dinged in relative value trades in the middle of March that lost the firm hundreds of millions of dollars. The firm ended March up 1.2% after paring back some of the losses from the relative-value trades, pushing gains for the year up to 5.7%, a source familiar with the situation said.

Griffin was quick to identify the threat of the virus, calling it a global health crisis in early February at an Economic Club of New York talk before it had spread much outside of Asia. Citadel sent millions to China at the beginning of February, as well as medical supplies.

"Take time to make sure your parents — and if you are fortunate enough, your grandparents — and those most at-risk in your lives are well cared for."

Read Ken Griffin's full memo:

Dear Colleagues,

In recent months, we have all been impacted by the coronavirus pandemic. We are in an unprecedented moment of global distress as the entire world faces this common invisible threat. And when the chaos settles, we will be measured by the character we exhibit in our work and in our communities.

In the blink of an eye, we now find ourselves juggling countless new demands on our time, mental capacity and emotional energy. Amid great uncertainty, it is natural to feel thrust into a tailspin. Few of us have ever faced this level of uncertainty in our lifetimes, and the weight of a myriad of new demands will impact each of us differently. We will all have our moments.

From the outset, we have actively engaged with community leaders, policy makers and political leaders – all the way up to the highest levels of government – to provide assistance during this crisis. We were one of the first firms to mobilize significant on-the-ground aid and provided early funding for vaccine research. As the effects of the pandemic have since stretched far and wide, we have continued to engage in our communities to help our neighbors in need, from combating food insecurity and promoting the safety of our first responders, to advancing testing and treatment methods.

Now let me make this distinctly personal. We are in the midst of a global health crisis. Take time to make sure your parents – and if you are fortunate enough, your grandparents – and those most at-risk in your lives are well cared for. Likewise, as the effects of this situation persist in our communities, look for opportunities to support local businesses and to help those who are struggling. Treat others with respect, and go out of your way to show kindness to your neighbors. This has always been core to our culture.

This must be a moment we look back on with pride – a moment when we looked out for each other and put the interests of our community and our team first. This is what it means to be part of Team Citadel. Let us go forward with character, integrity and compassion – now is when it matters most.

Sincerely,

Ken

Join the conversation about this story »

NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.

Larry Fink

The fixed-income-focused fund lost 20% from March 1 through March 20, sources told Business Insider. The fund manages roughly $1.7 billion.
For the year, the Obsidian fund is down more than 19% after returning more than 13% in 2019.
Credit markets have been rocked by evaporating liquidity, ratings downgrades, and the Federal Reserve's decision to cut interest rates to zero. The Fed has since enlisted BlackRock to set up three different bond-buying programs.
Visit Business Insider's homepage for more stories.

BlackRock's oldest hedge fund, its 24-year-old Obsidian fund, was hit hard in March, sources say, falling 20% as of March 20.

The $1.7 billion fund is down more than 19% for the year after earning more than 13% in 2019. The hedge fund, managed by Stuart Spodek, invests in rates, mortgages, and corporate credit across the fixed-income universe.

With the spread of the novel coronavirus, fixed-income markets have been rocked by ratings downgrades, evaporating liquidity, and an emergency Federal Reserve move to lower its benchmark rate to near zero. The Fed has since enlisted BlackRock to lead three different bond-buyback programs on mortgages, ETFs, investment-grade corporate credit, and more.

BlackRock declined to comment on the fund's performance.

Credit investors have been inundated with action over the past month, as municipal bond ETFs trade at steep discounts, ratings agencies downgrade well-known companies' debt to junk status, and investors call well-known distressed players to try and get money in their funds.

Funds focused on mortgage-backed securities have faced margin calls, and one fund has even sued its lender,RBC, for being aggressive in asking for its money back.

Join the conversation about this story »

NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.

Emanuel Friedman of EJF

Hedge funds have, on average, weathered the market turmoil caused by novel coronavirus relatively well — with a few types of funds producing some of their best returns in years.
But liquidity crunches at institutional investors like endowments and pensions may mean redemptions are on the way no matter what.
Hedge-fund investors sticking with the industry must now be cognizant of the business risk facing many managers that might lose big chunks of assets for reasons unrelated to their performance.
"Capital is king, and it's a precious resource right now," said Jon Aikman, who teaches a course on hedge funds at the University of Toronto's Rotman School of Management and sits on the endowment's investment committee.
Click here for more BI Prime stories.

Emanuel Friedman proactively put the gates up despite only 6% of investors wanting out.

According to a recent Wall Street Journal report, Friedman, the founder of the credit fund EJF Capital, is suspending redemptions from his firm's $2.5 billion Debt Opportunities Fund to "protect all of the Fund's investors by not selling assets into a nonfunctioning market."

While Friedman is not dealing with a mad rush to the door — though his fund was down 15% in March — hedge-fund investors are wary that redemptions are coming regardless of performance — adding another concern to a long list of them.

The industry's biggest investors — the pensions, endowments, and foundations that helped institutionalize the business— might be forced to redeem to meet obligations.

"This will produce a significant liquidity crunch for a lot of end investors," Craig Bergstrom, the chief investment officer of the fund of funds Corbin Capital, said.

Pensions have been struggling to meet their obligations for years, and Mike Moran, a pension strategist at Goldman Sachs Asset Management, said pensions were more underfunded than they were at any point in the financial crisis.

Endowments for hospitals, meanwhile, are going to be pushed to the limit with the additional stress placed on the healthcare system by the coronavirus pandemic. University endowments have been floated as a way to provide for students who were suddenly thrown out of housing and school.

"It could be that both the good and bad are redeemed," said Jon Aikman, who teaches a course on hedge funds at the University of Toronto's Rotman School of Management and sits on the school's endowment's investment committee.

"I'm deeply worried about the operational and business risks hedge funds face now," he said. "So many underfunded pensions are going to be seeking liquidity."

Managers have fared relatively well, with some funds, like macro investors and futures speculators, turning in their best performances in years. But shakiness in the structured-credit market — where one manager has already sued its lender, alleging it made aggressive margin calls— may be a sign of things to come.

"Many hedge fund strategies have very low correlations to capital markets benchmarks, and some are, or have the potential to become, negatively correlated during a market sell-off. This was seen in 2008 when few hedge fund strategies posted positive returns," the hedge-fund consultant Don Steinbrugge wrote.

To protect against a wave of redemptions, funds might begin limiting redemptions, like EJF did. Others, like Baupost and D.E. Shaw, may open up long-closed funds to raise assets in a time when "capital is king, and it's a precious resource," according to Aikman.

Allocators, of course, worry about business risks at hedge funds during nonpandemic times as well, with topics like founder succession on their minds, but those worries were put on the back burner when today's more pressing concerns became more feasible.

"Right now, we're laser-focused on urgent problems like managers' ability to meet margin calls and get waivers for falling NAVs. I look forward to a time when we can worry about longer-term business challenges," Bergstrom said.

DON'T MISS: 'We are in an unprecedented moment of global distress': Read the full memo billionaire Ken Griffin sent to Citadel employees on the coronavirus crisis

UP NEXT: Macro hedge funds are soaring while quants and stock-pickers tank. Here are the biggest winners and losers.

Join the conversation about this story »

NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.

breaking bad money pile

Valiant Capital Management, a hedge fund led by Chris Hansen, has gained 36% year-to-date through the end of March, The Wall Street Journal's Juliet Chung reported Thursday.
Meanwhile, markets were roiled by the coronavirus pandemic. The Dow Jones industrial average shed 23%, and the S&P 500 lost 20%.
The fund profited on short bets it placed against cruise lines, international airlines, and travel companies, according to the report.
Read more on Business Insider.

Amid a major market rout spurred by the coronavirus pandemic, one hedge fund has had outsize returns betting against the companies hit hardest.

Valiant Capital Management, led by Chris Hansen, has gained 36% year-to-date through the end of March, before fees, The Wall Street Journal's Juliet Chung reported Thursday, citing people familiar with the firm. Meanwhile, US stocks tanked — the Dow Jones industrial average lost 23%, its worst first quarter ever, and the S&P 500 lost about 20%.

The $1.4 billion fund was able to profit in the wreckage by placing strategic bets against leveraged companies that it saw being hit the hardest by the coronavirus outbreak. The hedge fund shorted stocks of cruise lines, international airlines, and travel companies, according to the report.

The returns are some of the best in the hedge-fund industry this year, according to The Journal. Hedge funds had been hurt by the longest-ever bull market, which ended when the coronavirus pandemic sent stocks tumbling in February.

Valiant also profited on credit-protection bets it made in mid-February as the coronavirus crisis increased the likelihood of corporate defaults, The Journal reported. It closed half of its hedge a month later, according to the report.

The fund also cashed in on put options, or contracts that allow the holder to sell shares at a specific price or date. Valiant had purchased cheap put options against indexes in the US and India and bought additional put hedges starting in late January as concerns about the virus rose, The Journal reported.

The notional values of Valiant's options contracts were between $1 billion and $2 billion at their peaks, according to The Journal. That's roughly the same size as the fund's entire portfolio.

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

FILE PHOTO: Bill Ackman, chief executive officer and portfolio manager at Pershing Square Capital Management, speaks during the SALT conference in Las Vegas, Nevada, U.S. May 18, 2017. REUTERS/Richard Brian/File Photo

The hedge-fund founder Bill Ackman said in a tweet on Sunday that he was "beginning to get optimistic" about a coronavirus recovery.
Weeks ago, the Pershing Square Capital Management CEO told CNBC that "hell is coming" and that the US risked entering "a Depression-era period" if the government doesn't issue widespread aid.
Ackman cited the first one-day drop in New York virus deaths on Saturday and the lockdowns throughout the country for his positive outlook.
Antibody tests nearing distribution will offer new insight into how close the US is to reaching so-called herd immunity, the billionaire added.
Visit the Business Insider homepage for more stories.

After netting billions in profit by protecting against the coronavirus market rout, Bill Ackman says he's hopeful that the pandemic will end sooner than expected.

The Pershing Square Capital Management CEO expressed new confidence in effective virus containment in a tweet on Sunday, citing the first one-day drop in New York virus deaths on Saturday and the shutdowns around the country.

The number of asymptomatic cases could also be far higher than estimated, the billionaire investor said, bringing the population closer to so-called herd immunity. The rate of less dangerous cases could be "50x higher than expected," Ackman tweeted, and antibody tests nearing distribution"will definitively answer this question hopefully soon."

"I am beginning to get optimistic," Ackman said, adding, "One could imagine a world in the next few months where everyone is tested and all but the immune compromised go back to a socially distanced but more normal life."

A sooner-than-expected conclusion to the global health crisis wouldn't be without its challenges, Ackman said. While the government has enacted a $2 trillion stimulus package to "backfill the economy and bridge us through the crisis," small businesses need more aid if they're to continue regular operations when the economy reopens, Ackman said.

The government's relief package set billions of dollars aside for small-business loans, but the hedge-fund founder said additional easing is needed to curtail "one of the biggest economic risks."

While uncertainty looms over all coronavirus projections, Ackman's track record has already minted him billions in profit. The billionaire's fund used a $27 million position in credit protection on investment-grade and high-yield bond indexes to protect against a heightened risk of default amid the pandemic. When credit markets flashed warning signals, the investments netted Ackman $2.6 billion.

The windfall helped Pershing Square Capital land an 11.1% gain through March, despite the S&P 500 tanking 12.5% over the same period.

The CEO's newly positive outlook marked a significant pivot from comments he made just weeks ago. In an emotional half-hour CNBC interview on March 18, Ackman told CEOs of his portfolio companies that "hell is coming" if the government doesn't issue widespread relief.

He later clarified that Pershing Square's hedge bets had already been closed by his interview and that he didn't aim to use his time on air to profit further.

Now read more markets coverage from Markets Insider and Business Insider:

Economists think coronavirus could push unemployment above Great Depression levels. Here's why the pain won't be as prolonged this time.

Goldman Sachs: The stock market's biggest driver will plunge 123% in a brutal 2nd quarter

GOLDMAN SACHS: These 13 cheap stocks are poised for years of better-than-expected profits — and they're must-haves as the coronavirus wipes out earnings in 2020

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

A Singaporean hedge fund had a moment straight out of "The Big Short" when it predicted the novel coronavirus would hammer markets and made a 40% gain on its flagship fund.
Dymon Asia Capital shorted the S&P 500 and Chinese stocks after identifying worrying trends in "alternative data" such as Google searches, Chinese road traffic, flights, and test kits, Bloomberg reported.
Dymon also bet on bonds to rise and the currencies of export-focused economies to drop, the Financial Times reported.
"It was clear the market was underpricing the impact of COVID-19," Dymon boss Danny Yong told Bloomberg.
Visit Business Insider's homepage for more stories.

A Singaporean hedge fund had a moment straight out of "The Big Short" when it predicted the novel coronavirus would cause a market meltdown, shorted the S&P 500 and Chinese stocks, and posted a 40% gain in its flagship $2 billion fund this year as a result, according to Bloomberg.

Dymon Asia Capital bet on markets to plunge after spotting red flags in "alternative data" such as Google searches in the US and daily measures of Chinese road traffic, flights, and the availability of test kits, Bloomberg said.

Comparing their levels to previous epidemics, Dymon realized that the coronavirus — which causes a disease called COVID-19 — posed a major threat and would likely spark a sell-off.

"It was clear the market was underpricing the impact of COVID-19," Danny Yong, Dymon's investment chief, told Bloomberg.

Dymon also bet on bonds to rise and the currencies of export-driven economies to drop, Yong told the Financial Times last month. The strategy fueled a 20% gain for its flagship Asia Macro Fund in February, he said. The fund is now up 40% for the year, Bloomberg said.

Yong underscored the scale of the coronavirus threat to the Australian Financial Review late last month. However, he doesn't expect indexes to fall much further because authorities are plowing billions into their economies.

"This is a health crisis leading to a crisis of confidence, leading to consumption collapsing, demand destruction and then an economic crisis," Yong said in the interview.

"I am not that bearish on the financial markets at this level because the central banks have reacted very quickly."

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

AlphaStim

Alpha Stim is a device that sends electricity through the brain with the aim of helping people with depression, anxiety, and insomnia.
Chicago-based hedge-fund performance coach Dr. Ken Celiano has also recommended it for traders who want to keep an even keel.
Performance coaches are common in the hedge fund industry, with Point72 founder Steve Cohen employing people like Tiger Woods' former performance coach Dr. Gio Valenti as well as Denise Shull.
Business Insider first spotted the device at Essentia Analytics' Behavioral Alpha conference in New York in November, where Celiano was wearing one while speaking on stage with Shull and other panelists.
"It's a huge part of what I do as a human discretionary money manager. I call it the 'game within the game,'" said hedge fund manager Zach Abraham, who told us in November that he has used the device.
Click here for more BI Prime stories.

One hedge-fund performance coach believes he's found something that's about to take off with hedge fund managers: A Walkman-looking device that attaches to your earlobes and sends a mild electrical shock through your brain.

Performance coaches are common in the hedge fund industry, with managers like Point72 founder Steve Cohen employing people like Tiger Woods' former performance coach Dr. Gio Valenti as well as Denise Shull, who had claimed in a lawsuit that the psychologist Wendy Rhoades in the Showtime series "Billions" is based off of her.

Business Insider first spotted the device at Essentia Analytics' Behavioral Alpha conference in New York in November, where Dr. Ken Celiano was speaking on stage with Shull and other panelists. Celiano was wearing the Alpha Stim device during the panel.

While we did not try the device ourselves, and cannot attest to how it may impact performance, we wanted to learn more about the lengths traders are willing to go in order to gain an edge.

The veteran Chicago-based performance coach says he has recommended the device to 20 traders. A device designed to calm investors might be appealing during the coronavirus pandemic, which has roiled global markets.

According to the device-maker's website and YouTube channel, Alpha Stim is an FDA-cleared treatment option for people suffering from insomnia, depression, pain, and anxiety.The technology has also been recommended to people with post-traumatic stress disorder, Celiano said.

"It creates that feeling of being even-keel," said Celiano of the device, which he was first introduced to when he was looking for a solution to his symptoms from restless leg syndrome.

"It gets a person out of fight-or-flight — being able to hold yourself in that state of uncertainty, but stick to a plan or strategy or idea, that's even-keeled."

Cranial electrotherapy stimulation is an FDA-approved method of treating anxiety and other mental illnesses that has grown increasingly popular as people search for ways beyond pharmaceuticals to treat diseases and disorders.

But the idea of this technology being put to use by traders in a high-stress environment is still relatively novel, according to Celiano. He said he reached out to the device-maker to see if there had been an influx of orders for finance purposes, and was told no, but told Business Insider in April that orders have increased with the traders he works with.

Celiano even said his daughter's boyfriend, a trader in Chicago, has been "using it daily" to help relieve stress during the coronavirus pandemic.

He thinks the technology could find fans in an industry obsessed with performance.

"It's a very interesting space to be in, because any way to influence alpha is going to get a tremendous amount of people interested," he said.

Hedge fund managers have been known to spare no expense to boost returns, with billions being thrown at alternative data and quants with doctorate degrees.

Praxis Capital founder Zach Abraham, who brought on Celiano as his performance psychologist, told Business Insider in November that he swears by the device.

Abraham said he first tried the tool because he needs to keep his stress levels low, because he has Lyme disease, and has had flare-ups caused by high-pressure situations. A founder of high-frequency trading shop Vine Street Trading who plays in the derivatives market, Abraham said he is constantly getting in and out of positions.

"This requires around-the-clock attention to markets and unfortunately you find yourself in a constant state of fight-or-flight. Your nervous system gets overstimulated and it can affect stress, sleep quality, the ability to stay present in other areas of your life," Abraham said in an email to Business Insider.

The device helps him "stay in the eye of the storm."

His use of the device is varied, he said, and on heavy trading days, "I'm typically using it regularly — both in the office during the trading day and in the evening when I'm wanting to relax."

On his six-person team, both his risk manager and his execution trader "aren't afraid to use the Alpha Stim when needed," he said.

Abraham said he has yet to experience any side effects. The website for the device states that mild skin irritation and electrode burns on the earlobes as well as headaches have occurred. (The website, selling its own product, compares the side effects to those of prescription drugs that are meant to treat different mental illnesses.)

When asked if he would recommend it to competing hedge fund managers, Abraham said no, tongue-in-cheek, because he doesn't want help any rivals, before saying "of course I would."

"It's a high-pressure business — performers in all walks of life need to understand that living in a constant state of fight-or-flight is not good for their health or their life outside of competition," he said.

"It's a huge part of what I do as a human discretionary money manager. I call it the 'game within the game.'"

The devices aren't cheap — ones that are send shocks through just the brain go for hundreds of dollars, while more extensive devices that treat pain in other areas of the body are more expensive.

To Celiano though, the device is just one part that helps investors find their "inner market"— what he considers to comprise "their feelings, their story, their perceptions, how they view the world through their own biases." Regulating emotions can be a big boost to the bottom line, he said.

"We're still dealing with the human data, which is the stories we tell ourselves," he said. "My mission is to help them know themselves."

Join the conversation about this story »

NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.

Commodity funds are shining as stocks tank, while momentum strategies are getting pummeled. Here's the latest data on who's riding out coronavirus chaos the best.

Ken Griffin's Citadel has sprouted a sprawling alumni network of hedge funds— showing the power of the $30 billion brand with day-one investors

Search Griffin's quickly expanding web

Bridgewater's All-Weather and Pure Alpha funds are down double-digits. Here's what billionaire Ray Dalio just told investors about his coronavirus game plan.

'Hell is coming': Billionaire Bill Ackman sent the stock market spiraling during a 28-minute interview filled with dire coronavirus warnings

Worse than the 2007 'Quant Quake': Huge quant names like Schonfeld and Bridgewater are getting slammed as market chaos blows up computer-driven trades

Michael Platt's BlueCrest just cut at least 10 portfolio managers as the firm pulls back from the basis trade that slammed Citadel, Millennium, and ExodusPoint

The founder of a macro hedge fund that's up 14% tells investors how his childhood living through the Lebanese civil war helped him prep for market turmoil

Billionaire investor Bill Ackman turned $27 million into $2.6 billion by betting that the coronavirus would tank the market

'Ground to a halt': Insiders detail the struggles of trying to launch a hedge fund during a global pandemic that's paralyzed investors and sapped liquidity

Billionaire investor Bill Ackman denies sounding the coronavirus alarm to tank markets and rake in $2.6 billion from hedges

Billionaire investor Bill Ackman asked Trump for an infrastructure boom after betting $500 million on a real estate developer

Macro hedge funds are soaring while quants and stock-pickers tank. Here are the biggest winners and losers.

Loser: Quants

Winner: Macro investors and CTAs

Loser: Fundamental stock-pickers

In-between: Big multi-strategy firms

Winner: Hedge fund allocators

In-between: Credit funds

'Follow the hot hands': HSBC lays out a coronavirus-investing playbook focused on funds that have beaten the market for years — and shares the top stocks in each

'We are in an unprecedented moment of global distress': Read the full memo billionaire Ken Griffin sent to Citadel employees on the coronavirus crisis

Read Ken Griffin's full memo:

BlackRock's $1.7 billion Obsidian hedge fund plunged in March as the coronavirus threw fixed-income markets into turmoil

A liquidity crunch for the hedge-fund industry's biggest backers could force redemptions on even top-performing funds

One hedge fund has surged 36% this year by betting against cruise lines and airlines depleted by the coronavirus outbreak

Billionaire Bill Ackman says he's 'beginning to get optimistic' about a coronavirus recovery, weeks after saying 'hell is coming'

A hedge fund made a 40% gain by calling the coronavirus sell-off and shorting stocks

How a brain-zapping device can calm hedge-fund traders' nerves when markets are chaotic, according to a veteran performance coach