Hedge funds outperformed a slumping stock market in January with strategies from activism to volatility plays, helping buff the image of an industry criticized in the last years for its high fees and failure to top climbing markets.
Worries about global growth plus fears about political and economic troubles in emerging markets dealt equity markets a blow in January, but big name hedge funds including Pine River, Citadel and Pershing Square ended the month with strong gains, according to people familiar with the funds' returns.
While first month numbers are no certainty for a positive year, industry analysts and investors say January's hedge fund returns may help burnish the $2.8 trillion industry's image after investors pulled out billions in December.
Pine River Capital Management, the $14 billion firm which became famous for its money making bets on mortgages in the wake of the 2008 financial meltdown, reported a 2.47 percent gain at its flagship multi-strategy fund and a 2.58 percent gain at its Pine River Fixed Income fund.
Chicago-based Citadel's flagship Kensington and Wellington funds climbed 3.4 percent. And William Ackman's Pershing Square International, the biggest portfolio at his $12 billion firm, gained 4.1 percent on news Suntory would buy bourbon-maker Beam, where Ackman has been the top shareholder since 2010.
Even managers who lost money last month, including Daniel Loeb, David Einhorn and Paul Tudor Jones, recorded smaller declines than the broader stock market. Loeb's Third Point was off 1.8 percent, Einhorn's Greenlight Capital was down 1.9 percent and Jones' Tudor BVI Global fund dropped 2.1 percent.
The average hedge fund ended January nearly flat, off just 0.56 percent, according to data from eVestment released on Friday. The Standard & Poor's 500 Index fell 3.5 percent.
Returns from these firms and others that pursue a range of strategies including global macro, fixed income and equity/long short show that there was no one single winning hedge fund strategy last month.
Instead they underscore what hedge fund managers have long promised their wealthy clients: returns less correlated with broader markets and gains even when broader markets are off.
"Hedge funds will differentiate themselves by adding alpha through cutting long exposure," said Michael Weinberg, chief investment officer at a family office and a professor at Columbia University's business school. "Initially they may suffer a minor capital loss, but it will be substantially less than long-only funds."
Pension funds, endowments and other wealthy clients have been waiting for this type of performance as they paid hedge funds' hefty fees but endured criticism that they have not gotten their money's worth in returns.
Last year when the Standard & Poor's 500 index surged 32.4 percent, the average hedge fund gained only 9 percent, after investors paid the average fund a 2 percent management fee plus a 20 percent performance fee. Hedge fund returns have lagged behind the Standard & Poor's 500 index since 2008.
In January, on average, funds that manage more than $1 billion were off 0.35 percent while mid-sized funds with more than $250 million but less than $1 billion in assets dipped 1.07 percent, according to eVestment data.
But there were some big winners.
Paul Britton's Capstone Vol Offshore fund gained 2.11 percent in January as volatility funds delivered their best returns in 17 months when the VIX, which measures implied volatility of the S&P 500 index, spiked.
Neil Chriss' Hutchin Hill was up 2.3 percent while David Tawil's Maglan Capital was up 3 percent, Reade Griffith's Polygon European Equity Opportunity Fundclimbed 4.31 percent and Jacob Gottlieb's Visium Institutional Partners fund gained 5.02 percent.
What will help hedge funds' performance is a chance to short, something most mutual funds are prohibited from doing, and show off their stock selection skills, investors said.
"Our view is that 2014 will be a strong year for stock pickers–long and short–due to greater equity dispersion, and January demonstrated that in spades," said Scott Schweighauser, president of Aurora Investment Management.
January's stock market sell-off might also prompt more investors — both large and small — to give hedge funds a try. Last year $67 billion in new money flowed into hedge funds, according to eVestment, and industry analysts expect there may be more demand this year.
For retail investors a number of hedge fund firms, including Arden Asset Management and Blackstone Group are offering so-called hedged mutual funds throughFidelity Investments and other brokers. Last year these types of funds offered mutual fund investors single-digit returns but they may become more popular now that investors are looking for safer investments again.
