The Effect of COVID-19 Pandemic on Hedge Funds
Just as the coronavirus has not discriminated by economic sectors, it has not done so at the level of asset management either. Earlier this year, it was seen how the crisis unleashed by COVID-19 left the balance of European ETFs negative in the first quarter of the year, the first negative in at least the last four years. And it is foreseeable that those repayments have been repeated in the asset fund industry as well. In the absence of knowing this balance, what has already been published in the impact that COVID has had on the hedge fund industry and this has been, predictably, negative.
According to the data collected by the data platform Hedge Fund Research (HFR), hedge funds closed the first quarter of the year with a net worth of fewer than $3 trillion, something that had not happened since the third quarter of 2016 or, what is the same, since the world was surprised by the affirmative answer to the consultation on Brexit. Specifically, these types of products were left in the first three months of the year $366,000 million, which left their assets at $2.96 billion, 12% less compared to the end of 2019.
This substantial asset decline was influenced by both net redemptions carried out by investors ($33 billion retired, the highest number of redemptions in a quarter since the second quarter of 2009, according to HFR data) and, on all, the general lousy behavior experienced by the different strategies applied by hedge funds.
Thus, the HFRI index fell 9.4% during the quarter, mainly due to the 7% decrease experienced in March. By type of strategies, those focused on event-driven were the ones with the worst performance, as the HFRI Event-Driven (Total) Index dropped 15.3% in the first quarter of the year. However, there were also other types of strategies that did manage to save what has been one of the worst quarters for the markets in decades. These are the macro-focused strategies. The HFRI Macro Total Index ended the quarter with a timid gain of 0.07%, while the HFRI Macro Currency Index ended this period with a rise of 5.1%.
“Investors reacted to the unprecedented increase in volatility and uncertainty brought on by the global coronavirus pandemic with a historic collapse in investor risk tolerance and the hedge fund industry’s largest capital rescue since the crisis. financial,” says Kenneth J. Heinz, HFR President. “While volatility and market dynamics remain fluid during the first two quarters, the asset reallocations created by the indiscriminate sale of traditional asset management have created significant opportunities for specialized long/short funds, which will likely benefit as much to forward-thinking funds as well as to institutional investors in the coming quarters,” he says.
Hedge funds have lost billions of dollars due to the economic stagnation caused by the COVID-19 pandemic, which led to a nosedive on Wall Street. But these financial instruments promoted by the world’s wealthiest investors project a recovery thanks to this same market debacle.
“Hedge funds based in the United States are aimed at persuading clients that the current economic crisis and the uncertainties it generates represent a unique investment opportunity. Stocks, corporate bonds and commodities have not been this cheap since the 2008 global financial crisis,” a key insight shared by Marc Malek, an American-Lebanese entrepreneur a Wall Street executive specializing in global macro hedge fund strategies.
High risk
“Hedge funds are considering both publicly listed companies and those that do not, with the assumption that the massive stimulus packages decided by the Donald Trump administration, mostly the $2.2 trillion approved, will revive the markets and the economy in general,” he further added. He is notably the founder and managing partner of Conquest Capital Group, a WallStreet-based asset management firm with assets amounting more than $1.2 billion.
Tycoon Kenneth Griffin was one of the first to warn of the dangers of the novel coronavirus outbreak, and his hedge fund Citadel created a specific investment vehicle for assets affected by the virus.
Called the Relative Value Fixed Income Fund, that instrument is designed to allow Citadel to take advantage of current volatility, a change from the 2008 financial crisis when the fund’s flagship investments posted losses of 55 percent.
Large profits
Economists now expect the pandemic, which has killed about countless people worldwide, to lead to a global recession. The International Monetary Fund stated that this is already happening. Some of the most vital sectors of the economy are currently in dire straits.
This is the case of aviation companies, which will receive a ransom, although perhaps not as big as they would like, hotels and restaurants, which have laid off staff en masse, and oil companies.
The S&P Global Ratings agency expects the default rate among US companies in financial difficulties to triple in the next 12 months, from 3.1 percent in December to 10 percent.
Boaz Weinstein, the founder of hedge fund Saba Capital Management, announced in a letter to his clients that he anticipates defaults and bankruptcies among companies that rating agencies consider financially fragile.
However, it is not sure that the funds’ bets are worth it, as it is unclear how many investors are interested in taking risks amid so much uncertainty. Many of them are putting their money in safe assets.
Bridgewater Associates, famous for making money during the disaster caused by the 2008 global financial crisis, acknowledged in a letter to clients that it had lost money this month due to unsuccessful bets in a rising stock market.