Omicron-fuelled volatility deals hedge funds worst monthly return since March 2020

Hedge funds are down an estimated 1.6% to 2% in November, according to early data from industry research firm PivotalPath, their worst monthly performance since March 2020.

The potential losses are a setback in what has so far been a steady year for performance. The average hedge fund is up 11.4% in the first 10 months of 2021, data from HedgeFund Research (HFR) showed. That compares to 11.8% last year and 10.5% in 2019.

The losses are “quite widespread”, said Robert Sears, chief investment officer of London-based Capital Generation Partners, which invests in hedge funds. “A few of our managers got a little bit of positive performance but I think, in aggregate, it’s going to be down.”

The S&P 500 fell 3.9% from its record high in November as Omicron worries hit stocks in the month’s final days, and notched a nearly 1% loss for the month as a whole. Some areas of the market, however, were harder hit, with the S&P’s energy sector losing 6.2% last month and financials losing 5.9%.

November also saw volatility rise across asset classes, with uncertainty over Federal Reserve monetary policy driving swings in bond and currency markets, as well as stocks.

The market swings wrongfooted some equity-focused funds, which were hit by losses in bearish bets against stocks that unexpectedly rebounded.

Jean Baptiste Berthon, senior strategist at Paris-based Lyxor Asset Management, which invests in hedge funds, said European and U.S. long-short strategies lost around 1.5% to 2% between Nov. 25 and Dec. 1.

Shares of Moderna, for example, which Sears said some hedge funds had bet against, jumped 30% between Nov. 18 and Nov. 30. Prior to Nov. 18, short interest in Moderna amounted to 14.4 million shares, or 4.1% of the float, according to data from S3 Partners.

Computer-driven trend-following hedge funds, meanwhile, suffered a “significant” performance drop of 4% to 5% between Nov. 25 and Dec. 1, with losses in fixed income, commodities and equities, creating a “perfect storm”, said Berthon.

So-called ‘macro’ hedge funds, which bet on macroeconomic trends, lost closer to 2%, mainly from bond positioning, while merger-arbitrage funds, which make calls on deals, were marginally up, he added.

Some hedge funds are likely to pull back on risk this month, in an effort to preserve returns in what has for many been a solid year, Berthon said.

“We’re now three weeks before the end of the year, so it’s unlikely we’ll see funds trying to be heroes and trying to re-instate major play to capture the rebound,” he said.