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Silver Lining For Hedge Funds In Market Chaos

May 14th, 2020

As financial markets worldwide continue to slowly push up from their March collapse, hedge fund investors are experiencing less of a ride and in some cases are seeing strong positive returns.

Hedge funds overall are down an average of 4.6% for the year through late April, according to a Reuters report. That contrasts with the S&P 500 which was down 10% for the same period.

More than a few managers are also seeing positive returns. Reuters said Pershing Square Capital Management's Pershing Square Holdings fund was up 13.6% in April and 17.3% for the year. The Wellington hedge fund is up 10%.

In March, when financial markets lost as much as 25% from their 2020 high, Barclay's Hedge Fund Index showed funds were down 9%. Since the beginning of the year, they are off 7%, better than the Dow Jones, which despite a strong April, is still off by 8%.

Writing in InvestmentWeek recently, Tom Kehoe, global head of research and communications at the Alternative Investment Management Association , said, "Hedge funds have managed to halve (or in some cases even more) the losses incurred by investors who have invested passively in equities or fixed income investments.

"Looking at previous market corrections, hedge funds have consistently demonstrated they have been able to manage these periods for investors better than anyone else."

Worried investors did pull some $33 billion out of hedge funds in the first quarter, most of it in March when the world's financial markets went into freefall. It was the largest outflow since the Great Recession.

The volatility and uncertainty caused by the pandemic drove what Hedge Fund Research President Kenneth J. Heinz called a "historic collapse in investor risk tolerance."

Yet, as Financial Times writer Laurence Fletcher points out, the outflow demonstrated a difference between the 2008-2010 recession and now. Today's hedge fund investors are by and large institutions that have done their due diligence and are more able to weather market gyrations than the investor of a decade ago.

That has also enabled astute fund managers to leverage opportunities.

Observed Heinz, "While volatility and market dynamics remain fluid through early 2Q, dislocations created by indiscriminate selling from traditional asset management have created significant opportunities for specialized long/short funds, which are likely to benefit both forward-looking funds and institutional investors in coming quarters."

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