Hedge fund returns for 2023 have begun rolling in, and the performance ranges from exceptional to terrible.
The stock market in 2023 returned 26.3% and 17.4% for the S&P 500 and Russell 2500, respectively.
Hedge funds rode the momentum, with Goldman Sachs Group reporting that hedge fund "crowding" — or ownership by hedge funds of the same stocks — hit a new high in 2023, driven by bets on the "Magnificent Seven" technology stocks.
The Magnificent Seven refers to Apple, Microsoft, Alphabet (Google), Nvidia, Amazon, Meta Platforms and Tesla. As a group, the seven companies returned 107% in 2023.
"In some respects, the crowding is understandable," said Curtis Jensen, portfolio manager at JEN Capital Partners, a New York value investment manager with $23 million in assets.
"Nevertheless, the herding of $2.5 trillion of hedge fund assets into a small group of richly valued, perhaps grossly overvalued, momentum stocks like the Magnificent Seven strikes me as perfectly antithetical to contrarian, risk-averse tenets."
And yet, only 11 hedge fund firms beat the S&P, "which begs the question, why invest? Hedge funds should only be able to charge the enormous fees they do if they beat the market," said Laura Goldman, a Miami-based adviser to ultra-high-net-worth families. "Pershing Square barely beat the S&P. [Pershing founder and CEO] Bill Ackman needs to get back to his day job," she said. Pershing Square Capital Management returned 26.7% in 2023.
However, Michael Weisz, founder and CEO of YieldStreet, which offers alternatives to family offices and institutional investors, said that on a three-year performance basis, "most hedge funds have outperformed the S&P, so a one-year comparison isn't quite fair." For example, since its inception in 1990, Citadel’s flagship fund posted 19.6% annualized returns, outpacing the S&P annualized return of 10.7%.
Multistrategy funds ended 2023 in the middle of the pack, with some of the largest firms posting midteen double-digit returns.
Among the multistrategy hedge funds that have reported so far are Ken Griffin's Citadel Wellington, up 15.3% for 2023; Och-Ziff Master (Sculptor), 12.9%; Sculptor ultimately was sold to Rithm in November 2023.
Steve Cohen's Point72 Asset Management gained 10.6%; D.E. Shaw Composite returned 9.6%; Winton Multi-Strategy gained 5.6%; Schonfeld Fundamental Equity, 4.6%; and Schonfeld Strategic Partners, 3.1%.
ALLOCATORS SATURATED
Returns were all over the spectrum. One hedge fund posting big losses was Haidar Capital Management, which tumbled 43.5% in 2023. Bridgewater Associates' Pure Alpha II fund slumped 7.6%.
On the other end of the returns, SoMa Partners rose 62.1%, Whale Rock Long Only returned 59.3% and emerging-markets-focused Discovery Capital Management — also known as a Tiger cub — gained 48%. Chase Colman's Tiger Global Long Only gained 20.4% last year.
Macro funds such as the Brevan Howard Master Fund lost 2.1% in 2023, while Rokos Capital Management gained 8.8%. Among the top performers in macro were Alphadyne Global Rates, and Tekmerion Capital, up 17.1% and 9.8%, respectively. Graham Capital Management's Proprietary Matrix fund returned 2.9%.
Some allocators appear to have had their fill of hedge funds, Agecroft Partners' founder and CEO Don Steinbrugge said in a recent research note on 2024 industry trends.
"Pension funds, endowment funds, foundations, sovereign wealth funds, OCIOs, private banks and advisers firms seem to have reached a saturation point in fully allocating a percent of assets to hedge funds," he wrote. Consequently, the industry's future growth will likely slow, he said.
In addition, pension funds are reducing the average size of managers to which they allocate.
"As pensions struggle to enhance returns to meet their actuarial assumptions, we will also see an increase in the speed of the evolution of pension funds' hedge fund investment process," Steinbrugge said.
Many have added an emerging-manager component to portfolios to take advantage of capacity-constrained strategies, capture higher returns or benefit from a larger fee break, he said.
Bloomberg contributed performance data to this story.