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Connecticut hedge funds face mixed fortunes

January 18, 2019

It was an underwhelming performance for the U.S. hedge fund industry last year. The predicament extended to some of the top asset managers in Connecticut.

As markets grew more volatile, the likes of AQR Capital Management and Point72 Asset Management could not match the lofty investment returns of the industry’s halcyon years. But the struggles of those firms — which invest in a range of assets — have not created much of an opening for challengers to lure away large investors because the sector’s growth has stagnated.

“Recently, the quantitative factor-based liquid (alternative-investment strategies) that we favor at AQR have had tough times,” AQR’s co-founder and chief investment officer, Cliff Asness, wrote last September . “Every time any of our strategies go through tough periods, we take a step back and consider specific hypotheses as to whether the recent returns are a harbinger of the future.”

Mixed results

Greenwich-based AQR produced in the past year positive returns in only two of its 41 mutual funds, while Stamford-based Point72 returned less than 1 percent for its investors , according to Bloomberg.

In what was likely a related move, AQR confirmed last week that it had made layoffs.

“Recent small reductions in headcount reflect the need to balance our workforce growth with the current needs of our business,” the company said in a statement.

Before the cuts, the firm had made “record headcount growth over the past three years,” the statement also said.

Last year, AQR employed about 770 in Connecticut, according to the state Department of Economic and Community Development. The company is eligible for up to $35 million in state tax credits and grants, based on it reaching certain job targets.

For Point72, the past year marked its first as a hedge fund. It raised about $5 billion in outside capital, bringing its total assets under management to approximately $13 billion.

It had previously operated as a family office that mainly invested founder and CEO Steven Cohen’s multbillion-dollar fortune, following a two-year federal ban on managing third-party investments that was linked to 2013 insider-trading violations at Cohen’s previous hedge fund, SAC Capital Advisors.

At its peak, SAC yielded average estimated returns of approximately 30 percent.

Point72 declined to comment when reached this week.

Westport-based Bridgewater Associates, the world’s largest hedge fund by assets under management, fared much better. Its cornerstone Pure Alpha fund posted a 14.6 percent return last year.

The firm’s investment strategy could point to its anticipation of an economic slowdown.

“A lot of optimism about future earnings growth has been baked into equity valuations,” Bridgewater Co-Chief Investment Officer Bob Prince said in an interview last October with the Financial Times . “But we are at a potential inflection point where the economy is moving from hot to mediocre.”

Bridgewater officials could not be reached for comment this week.

Local firms’ results did not surprise Connecticut Hedge Fund Association President Bruce McGuire, who cited their varying specialties in assets including stocks, bonds and futures contracts.

“It would surprise me only if they all managed ‘equity long/short’ funds, and there was great dispersion in returns,” McGuire said.

Overall, U.S. hedge funds lost an average of 0.09 percent on their investments in 2018, according to financial-services data firm Preqin. In 2017, they recorded an average gain of 11.3 percent.

As markets become more unstable, hedge funds are increasingly hard-pressed to find sure-fire investments. Nearly every major asset class — including the S&P 500 stock index, which last year finished with a 4.4 percent loss — saw returns decline or change negligibly during the past year.

“It is difficult to make money when all assets go down,” said John Knopf, an associate professor of finance at the University of Connecticut. “The only way you were going to make money was to ‘short’ things.”

Institutional support

Institutional investors such as corporate and public pension funds, university endowments and foundations remain linchpins of the industry.

Yale University’s endowment comprises the largest Connecticut-based institutional investor with hedge funds, according to Preqin. It allocates about $6 billion to such asset managers.

Messages left for a Yale spokeswoman were not returned.

The pension fund of Farmington-based United Technologies Corp. ranks second in the state. It allots about $3.5 billion to hedge funds.

UTC declined to comment when reached.

Status quo

Despite the inconsistent results, Connecticut remains one of the world’s top hedge fund hubs.

Among the states, Connecticut hosted last year the third-largest number of active hedge fund managers, 211, according to Preqin. Only New York and California had more.

After New York, the state ranked No. 2 in assets under management, with a total of about $384 billion.

A handful of firms still dominate the industry in the Nutmeg State. As the world’s largest hedge fund, Bridgewater operated with about $163 billion of assets under management, according to Preqin. AQR is No. 2 in the state, with holdings of about $114 billion.

Those companies are unlikely to soon be surpassed by startups.

The number of active hedge funds in Connecticut shrunk by 9 percent between 2016 and 2018, to about 700, according to Preqin. In five of the past six years, fund liquidations have exceeded fund launches in Connecticut.

A diminishing industry reflects doubts about its effectiveness.

Some investors balk at the annual management fees and share of returns commanded by hedge funds. Connecticut-based firms’ average management charges equaled 1.47 percent of their assets, Preqin reported.

“The question is asked, ‘Can I expect an active fund manager to do better than the overall market?’” Lawrence J. White, a professor of economics at New York University, said in a recent interview.

pschott@scni.com; 203-964-2236; twitter: @paulschott

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