Hedge Funds Feel Episodic Volatility: ‘You’re Going to Get Hurt’

Hedge Funds Suffer Losses

By Hema Parmar | March 2, 2018, 12:35 PM PST

  • Graham’s biggest fund is said to decline 7.8% in February
  • Laffont’s Coatue among major firms bucking month’s downtrend

Hedge Funds Feel Episodic Volatility: 'You're Going to Get Hurt'

Some big-name hedge funds are suffering losses even after getting what many in the industry have been asking for: more volatility. It just wasn’t the right kind.

February was marked by a massive market selloff early in the month, a change from the years of calm that some managers blamed for lackluster performance. But the turmoil hasn’t been sustained enough for some traders to capitalize.

Graham Capital Management, which manages $17 billion, lost 7.8 percent last month at its largest fund, the $8.9 billion Tactical Trend pool, leaving it down 3.3 percent in 2018, according to people with knowledge of the matter. The Rowayton, Connecticut-based firm’s $2.8 billion K4D-15V Fund, which leverages its computer-driven macroeconomic wagers, lost 9 percent in February and is down 4.3 percent for the year, said the people, who asked not to be identified because the information isn’t public.

Investors were caught by surprise when markets suddenly began to roil. On Feb. 5, the Dow Jones Industrial Average plunged 4.6 percent, its biggest one-day drop since 2011, and the VIX volatility index more than doubled to 37 amid concerns that inflation could force the Federal Reserve to raise interest rates faster than expected.

“Episodic volatility is always a challenge and no matter how great of a manager you are, if it’s episodic you’re going to get hurt,” said Adam Taback, head of global alternative investments for Wells Fargo Investment Institute. “Sustained volatility is what you’re really looking for.”

RenTec Drops

Renaissance Technologies, which in January had warned clients of a “significant risk” of a correction, lost 3 percent in its stock fund in February as the S&P 500 Index slumped 3.7 percent, according to an investor update. The New York-based firm’s Renaissance Institutional Equities Fund, designed to outperform the S&P 500 Index by 4 to 6 percentage points annually, is down about 1 percent this year. The fund had $22 billion in assets at the end of last year.

Dan Loeb’s equity-focused Third Point Offshore fund sunk 3 percent last month, hurt mostly by its long holdings across a number of sectors, while its wagers against certain stocks helped, the firm said in a shareholder report. David Einhorn’s Greenlight Capital fell 6.2 percent.

Trend Followers

Trend-following hedge funds got hit last month as the strategy, known for producing strong returns during the market crashes at the turn of the century and in 2008, didn’t live up to its image as a shock absorber.

David Harding’s Winton Capital Management, which runs about $29 billion, saw its main fund sink 4.3 percent last month through Feb. 23. The London-based firm’s $9.8 billion Winton Fund uses mathematical models to wager across asset classes. In November, Harding warned that the VIX is misunderstood and could be the source of a market accident.

Some firms managed to buck the selloff.

Philippe Laffont’s equity-focused Coatue Management rose 1.5 percent in February, pushing gains to almost 12 percent for the first two months, according to a document seen by Bloomberg News.

Luxor Capital Group, the $3 billion event-driven firm, saw its main hedge fund gain 3.6 percent last month, another person said. That brought the year-to-date return for Luxor Capital Partners Offshore fund to 7.8 percent.

A spokesman for Coatue didn’t respond to requests for comment. Spokesmen for the other firms declined to comment.

— With assistance by Saijel Kishan, Sonali Basak, and Simone Foxman