September 21, 2019

Hedge Funds Living in the Past

Living in the Past

Hedge funds taking a cue from Jethro Tull may see parallels in last year's market.

All hedge funds have to study the history of the markets to notice possible patterns in the future. (Though past performance is no guarantee of future results.) Hedge funds living in the past may see trends others miss. Barron’s Eric Uhlfelder reports:

Which hedge-fund strategies are working and which aren’t? Fixed-income-related plays continue to set the pace, led by asset-backed securities, which are up an average of 6.2% (Barron’s highlighted this trend in “Best 100 Hedge Funds,” May 21). On the equity side, health-care and biotechnology funds have enjoyed plump returns, up 6.3% through the end of May, with some drop-off expected once June concludes. Less encouraging, energy-focused funds have taken it on the chin, down around 7%, short-bias funds have lost more than 8%, and market-neutral funds are up just fractionally this year, according to BarclayHedge, another data provider.

Health-care and biotech funds have continued a rally that started in the fourth quarter of last year, when they climbed 7.65%. Gareth Powell, a health-care portfolio manager at Polar Capital, a $5 billion London-based hedge fund and long-only asset manager, explains that the sector is thriving on its defensive characteristics.

Unless there’s an economic meltdown, he surmises that health care will thrive for the rest of the year as consolidation continues, especially in biotech, insurance, and hospitals.

Equity short bias has been the worst-performing hedge-fund strategy so far in 2012. But David Schroll, who uses it in managing Waterloo Partners, is up 4.86%. The small-cap-focused fund (gaining exposure to stocks with market caps of $300 million to $2 billion) has faced some challenges because of the market’s herd mentality. “When equities move as a group, which they’ve largely been doing since the start of the financial crisis, it’s very difficult for research-driven managers to outperform,” Schroll says.

Hedge funds living in the past may see similar themes this year from last year. The health-care sector was up significantly at both points, there’s a stock run-up, but bonds are down slightly this year. Health-care may be best for up and down markets.

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