Hedge funds suffer humbling losses in coronavirus chaos

Some of the hedge fund industry’s biggest names made history in March -- for all the wrong reasons.

Firms run by Ray Dalio, Michael Hintze, Adam Levinson and others suffered their worst-ever losses last month, with some funds down as much as 40% as the coronavirus pandemic battered global markets. Overall, three out of four hedge funds lost money, according to preliminary data compiled by Bloomberg.

That kind of performance by some of the world’s most prominent firms undermines the rationale for hedge funds, which in theory are supposed to make money when other investment strategies backfire during downturns and periods of volatility. The poor showing might also lead investors to question why they’re paying hedge funds some of the highest fees in the money management industry.

“March has been a devastating month for some funds and some strategies,” said Ed Rogers, head of Tokyo-based Rogers Investment Advisors. “Many funds are going to be throwing up gates and going into survival mode.”

Dalio’s Bridgewater Associates saw its flagship Pure Alpha II hedge fund get caught on the wrong side of the sell-off that began in late February, sending it down about 16% last month. The market chaos hit Bridgewater at the “worst possible moment,” when its portfolios were tilted to benefit from buoyant markets, he wrote to investors in mid-March.

Hintze’s $3 billion CQS Directional Opportunities Fund plunged 33% in March, nearly three times its previous worst monthly decline, as structured-credit wagers soured with the broader market. A CQS strategy focused on asset-backed securities fell more than 40%.

Levinson, who runs Graticule Asset Management from Singapore, said in a letter to investors that March was “epically turbulent.” His macro hedge fund posted a 9% decline, its biggest ever, as bets on equities in Japan, China and the U.S. and some fixed-income trades soured, according to the letter seen by Bloomberg.

Spokespeople for Bridgewater, CQS and Graticule declined to comment.

The dismal performance by many funds during the pandemic should prompt an industrywide examination of how clients are charged, according to Andrew Beer, founder of New York-based Dynamic Beta investments.

“The problem with paying high fees during a bull market is that managers don’t give them back to cover your losses in a bear market,” Beer said. “How many managers who made a killing on performance fees last year will give them back now?”

Rather than align firms’ incentives with those of their clients, the current fee structure -- with a management fee plus a charge based on performance -- too often means managers make money, while investors bear all the risk, he said.

Funds of all stripes were undone by the precipitous decline in stocks and extreme instability in credit, currencies and U.S. Treasuries. Wall Street’s fear gauge, the CBOE Volatility Index, soared to all-time high and sparked sharp losses for funds betting on calm to prevail in the market.

Equity hedge funds suffered their second-biggest slump since Hedge Fund Research Inc. started compiling the data three decades ago. One such firm, New Jersey-based Crawford Lake Capital Management, saw its funds lose as much as 35.6% in the first quarter, prompting the firm to apologize to its clients.

“In all, there was a 28-day period in which the market could not muster even a two-day bounce,” the firm wrote in an April 7 letter to investors seen by Bloomberg. “This is a streak that counts as one of the most extreme in memory.”

Crawford Lake said it expects assets to slide to $600 million by June 1. It managed about $1 billion at the start of the year.

Benjamin Fuchs’s multistrategy firm BFAM Partners in Hong Kong was hit with losses of 17% in March.

Spokespeople for BFAM and Crawford Lake declined to comment.

As liquidity vanished from credit markets, nine out of 10 credit hedge funds lost money, according to the preliminary data compiled by Bloomberg. Losses also mounted for some of the world’s biggest activist hedge funds, which make concentrated wagers on share prices to rise.

Still, some hedge funds managed to make money amid the turmoil, including Brevan Howard Asset Management’s flagship, which posted its best monthly gain in March, jumping about 18%, according to people familiar with the performance. Billionaire Chris Rokos’s macro hedge fund had its best month ever, gaining 14% in March.