| Joseph Edelman, Perceptive Advisors (Bloomberg) |
Talk about volatility.
Many hedge funds suffered steep losses in the first month or two of this year and have been desperately battling to get back into the black ever since. And several others have experienced huge swings in performance in just the past few months. One of them turned a big gain into a huge loss, while at least two funds that suffered double-digit losses earlier in the year are now solidly in the black.
We recently highlighted The Horseman Global Fund, which is down nearly 18 percent for the year through November after losing nearly 5 percent in October and 12.6 percent last month.
Earlier in the year The Perceptive Life Sciences Fund, managed by Joseph Edelman’s New York-based Perceptive Advisors, suffered a 12 percent loss in January and was down 17 percent through February, its low point.
However, the biotechnology and health care fund surged 18.13 percent in September, putting it up 13.2 percent through the first three quarters of the year. That is a more than 31-percentage-point swing in performance. Through November, it was still up about 4.5 percent for the year.
The latest example of a high-profile fund to rapidly reverse an early loss is Mick McGuire III’s Marcato International, managed by his San Francisco firm Marcato Capital Management. The activist fund declined by about 12 percent in the first half of the year. However, the fund surged more than 12 percent in November alone and is now up nearly 11 percent for the year entering the last month. This is a 23-percentage-point swing in performance.
All three of these funds are vastly different from one another, yet they have one thing in common: They deploy highly volatile strategies that lend themselves to quick swings in performance.
Horseman has been famously heavily net short for several years and had made a huge bet on bonds. So when interest rates started to change direction before the election, its fortunes turned swiftly.
Perceptive is heavily engaged in the inherently volatile biotechnology industry, taking stakes in a large number of small, fledgling companies. News concerning new drug trials or mergers and acquisitions often result in huge one-day moves in the stocks in its portfolio.
Marcato typically has more stocks in its portfolio than most other activists. It had 26 individual U.S. long holdings at the end of the third quarter.
However, its ten largest positions accounted for more than 80 percent of the assets, while the three largest positions alone accounted for nearly 40 percent of assets.
The three stocks are long-time activist holding Sothebys Holdings, Goodyear Tire and Rubber and its newest target, Buffalo Wild Wings. As it turns out, November was one of those months an investor dreams of, as virtually of its major positions made huge gains.
In November, Sothebys returned nearly 9 percent, Goodyear gained 5.7 percent and Buffalo Wild Wings -- a stake Marcato established in the third quarter -- surged nearly 16 percent.
Meanwhile, The Bank of New York Mellon Corporation, Marcato’s fourth-largest holding, accounting for about 10 percent of assets, jumped 9.6 percent. It benefitted from the overall revival of financial stocks since Donald Trump was elected president.
United Rentals, Marcato’s fifth-largest long, surged more than 33 percent last month. The company, which rents equipment to construction and industrial companies, benefitted in part from the prospects of an increase in economic growth.
Computer Sciences Corporation, the IT consultancy and Marcato’s next-largest long, gained more than 11 percent.
Given the inherent volatility of these three funds and their strategies, it is nearly impossible to forecast how the funds will wind up finishing the year.
