Hedge Funds to Watch in 2022

As the year draws to a close, it is an opportunity to look at the investments being made by strategic money managers and what they are expecting to see from their capital moves. Tracking the recent quarterly activity of hedge funds that have taken large positions in particular companies or those that have expanded long-standing positions, allows us to highlight the bullish signals indicating a company’s prospects for yielding significant returns.

U.S. News and World Report published their list of 2022’s top hedge funds. The list included the “usual suspects”: Scion Capital Management LLC (Michael Burry of The Big Short fame), Citadel LLC (Ken Griffin), Bridgewater Associates LLC (Ray Dalio), Renaissance Technologies LLC (Jim Simons), and Elliott Investment Management LP (Paul Singer).

Modeling billionaire investors makes a lot of sense; they have proven results and loads of experience. But there is also a backlog. The data is often retrospective in nature. A hedge fund only files the 13F typically six weeks after the quarter has concluded, which leaves a big window for managers to offload.

Hedge Funds Now Playing in the Major Leagues

Sports teams and sporting franchises were once owned by families. Nowadays, even with the economic instability around the world, hedge funds and investment consortiums are buying up the big players.

In May 2022, Todd Boehly put together a conglomerate deal of $5.3billion to buy the Chelsea football club. Roman Abramovich, the club’s previous owner, put the team up for sale earlier this year. Clearlake Capital, a California-based investment firm, is the majority shareholder and Boehly is acting as the controlling owner.

Of particular interest is the fact that Boehly, who already co-owns the Los Angeles Dodgers, outbid 11 other investment groups—a clear sign that hedge funds and money managers see the Premier Leagues, and sporting names in general, as promising opportunities.

“[We] are seeing more money coming into sport from institutional investors,” said David Gandler, the co-founder and director-general of fuboTV, the American TV streaming provider.

Highest Hedge Fund Inflow in seven years

The current financial volatility, spiraling inflation, market uncertainty, hardline constraints of central banks, and geopolitical conflict in Europe seem to be doing nothing for the hedge fund industry. The assumption that investor involvement in the market might be reduced by all these factors, opting for care and restraint in tenuous times, is proving to be entirely unfounded.

Hedge Fund Research (HFR) recently released a report indicating that institutional investment in the first quarter of 2022 was the highest new capital hedge fund allocation since the second quarter of 2015. Furthermore, the research suggests that all those elements— inflation, increased interest rates, and war in Eastern Europe—are the motivators of this seven-year-high.

Will this hedge fund trend continue for the remainder of 2022? According to a Barclays’s survey from February of this year, the prospects are promising. The continued acceleration of inflation is likely to prompt investors to lower their exposures to cash, passive-equity, and fixed-income; hedge funds are the safe alternative. Preqin, an investment-data firm and hedge-fund specialist, on the other hand, is less hopeful. Looking only at performance, the first quarter of 2022 was among hedge funds’ most dissatisfying quarters.

“Institutional investors are likely to continue increasing their commitment to funds combining effective, volatility-positive, capital preservation with managers offering opportunistic exposure to interest rate and inflation trends, with these effectively complementing existing portfolio holdings and duration. Funds tactically positioned to navigate these multi-asset trends are likely to lead industry performance and growth through mid-2022.” 

Kenneth J. Heinz, president of HFR

Crypto as a Driving Force in Hedge Fund Growth

The FX market has been unpredictable for quite some time, but now it seems that hedge funds with a quantitative concentration—those known for making lightning-speed trades on grand scales—are looking at crypto for their next big investment move. Crypto’s value differs significantly across markets yielding a plethora of opportunities for hedge fund managers with strong computer skills and strategies to reap large returns swiftly; the extreme price variability offers quick profit.

Overall, crypto assets have expanded by close to 200% in the last year, going from less than $800 billion to $2.3 trillion. This growth can be attributed to the overall dearth of oversight in this area, leaving it wide open for market-making opportunities. The latest report from PwC indicated that quantitative trading strategies are used the most often in crypto exchanges. These approaches use a simultaneous buy and sell strategy to profit from price differences between coins; they are perfect for markets that are low compliance and highly fluid.

But only the swiftest and most agile hedge funds—those that manage to refine their trading practices in real-time—will manage to survive and thrive in this constantly changing market. They will need a comprehensive solution for their extant trading requisites that they can then use alongside mainstream market data. Managers will need to not only be connected to the regulated crypto exchanges but also bypass major counterparty-to-counterparty platforms.

Gold is Again on Trend for Hedge Funds

Commodity analysts from Societe Generale report that money managers bought $7.1 billion in gold in February. This is the fourth-biggest week of bullish buying since 2006, when CFTC started its updated reporting. Most explanations for this rise point to recent geopolitical instability. While gold is an imperfect hedge for funds, it is an appealing asset against inflation and other stock market risks.

New Investment Opportunities for Hedge Fund Industry

The pandemic continued to affect the economy throughout 2021, hedge funds proved to be a flexible and adaptive industry. New investment strategies and strong earnings also yielded an improved opinion of hedge funds in general, according to the 2021 EY Global Alternative Fund Survey.

210 managers and 54 investors participated in the survey and showed that the industry is taking on new prospects for investment including digital assets and special-purpose acquisition companies (SPAC).

The survey also showed that hedge funds are focusing more on environmental, social, and governance (ESG) standards in the investment decisions process. Similarly, attention is being given to considerations of diversity and inclusion at the managerial level. But even while fund managers indicated substantial diversity in the back offices, fewer than one in 10 hedge funds can claim 30% or more females in the front office. The representation of minorities is even lower.

Hedge Fund Consolidation: Eisler Capital and Glen Point Capital

Mergers and acquisitions are not a common step for hedge funds. But the increased stresses of the industry, including skyrocketing costs and investors’ penchant for established entities, is forcing many funds to close their doors. Some are opting to merge with bigger institutions, like Eisler Capital which is acquiring Glen Point Capital in a rare hedge fund consolidation.

The transaction expands Eisler’s assets by $1.5 billion, bolsters the staff with new traders, and adds three new funds. Cumulatively, the deal transforms the firm into a multi-strategy investment platform.

Both firms are based in London and started in 2015. Over time, Eisler has expanded their portfolio as part of its efforts to compete with Millennium Management and Citadel for investors, resources, and staff. The deal is expected to close in March and the specifics of the financials were not made public.

Sculptor Capital Management is an Emerging Hedge Fund Favorite

Sculptor Capital Management, Inc. (NYSE:SCU) had a place in 19 hedge funds’ portfolios by the end of Q2 2021. This is remarkable particularly because the previous all-time high was 17.

Specifically, Renaissance Technologies, maintained the largest position in Sculptor, with a $1.3 million investment at the end of the quarter. ExodusPoint Capital also took up a $0.3 million share at the same time.

SCU stock returned 3.4% since the end of the second quarter and has consistently outperformed the market by wide margins.

Sculptor’s current success and favor might stem from its recent change in leadership.  Jimmy Levin, as the new CEO, is committed to an investment model that is based on full collaboration across their teams and products. In turn, this has yielded a boost in 2020 returns. Their new dividend policy favoring shareholders has equated a 12% yield at the current share price ($3.19 in dividends), which is likely also a contributing factor.

Managers Confident of Global Growth

Hedge fund managers around the world have overwhelmingly indicated their confidence for continued growth despite the current market volatility and the ongoing Covid pandemic.

A recent study by the Alternative Investment Management Association’s (AIMA) Global Hedge Fund Confidence Index, 99% of managers believe that their prospects will continue to grow and show increased second-quarter results.

Geography had little effect on these findings: managers in EMEA, the UK, and the Asia Pacific all showed confidence. Only U.S. based managers showed slight hesitation because of Delta variant concerns, but they all viewed it as a “temporary setback with travel expected to recover strongly”.

Hedge Funds are Back- Primarily in Emerging Market

Year-to-date returns for hedge funds are showing signs of recovery, particularly in emerging markets where managers are spurring the playing field and pushing gains.

Both BarclayHedge and eVestment recently published data showing the extent to which emerging markets and Asia-focused hedge funds bypassed other geographical regions in August, upending the July downturn.

hedge funds in emerging markets

The overriding theme points to a shift in consumer spending in evolving economies which is also linked to the development of the middle class in emerging markets that have increased disposable income. Even with the market volatility of Covid-19, the confluence of people in emerging markets getting wealthier and older, the increase in virtual and online consumerism, and a flourishing local travel economy, yielded positive returns for hedge funds in these markets.