Stock-picking hedge funds poised for worst performance in 10 years

Hedge funds that actively buy and sell stocks are set for their worst performance in 10 years, based on new data from Preqin, suggesting that the tide may be turning against stock picking strategies.

Globally, funds that buy and sell stocks have seen their cumulative returns drop 12.24% in the 12 months ending July 31, investment data provider Preqin said. Year to date cumulative returns for 2022 were down 11.42%.

Growing global recession risks, rising interest rates and an inflation surge not seen in decades threatens to reverse a 10-year run-up in the U.S. S&P 500 index (.SPX).

The S&P 500 stock index is down 16% so far this year and set for its worst year since 2008.

Stock picking, where a portfolio manager actively decides when to buy and sell a stock, traditionally has been one of the most commonly used trades among hedge funds.

But this approach faces an increasingly uncertain market backdrop. Equity hedge funds in general are down 10% for the year, while credit funds which trade bonds have fared better and are down around 2%, Preqin said.

“Stock picking has become difficult in a world of high inflation and rising interest rates,” said London-based hedge-fund manager Crispin Odey.

Odey, whose fund manages $4.7 billion in assets, said it was difficult to find opportunities to short or bet against a stock, when inflation has eroded the value of money but not the nominal value of companies. Odey said his hedge fund is up 130% year-to-date and up 15% in August.

Choppy markets have hit profits from other hedge fund trading strategies.

Systematic equity hedge funds that code their trading ideas into computer programmes had a negative 3.68% return cumulatively in the 12-months ending in July, the Preqin data showed.

Bond funds managed actively and by computers had negative cumulative returns of 1.06% and 1% respectively for the same period, Preqin said.

“This has been a year when the tide has gone out and we can see who is swimming with no shorts on,” Mark Dowding, the chief investment officer of BlueBay Asset Management said, referring to comments made by billionaire investor Warren Buffett.

BlueBay’s hedge funds, which trade bonds, are up between 5-17% in 2022, Dowding said.

In contrast, macro trading hedge funds which buy and sell financial instruments based on the economic outlook are having the strongest year so far, the Preqin data showed.

Actively managed macro hedge funds were up 6.39%, a bit more than those managed systematically, which have brought in cumulative returns around 3.08%.