In general, 2015 was a tough year for hedge funds. The markets took a beating in the summer, led by major declines in the Chinese markets.
In spite of this, some hedge funds are on track to turn in a solid year of gains for their investors. Two funds in particular stand out not just for their returns, but also for how they invested this year and what everyday investors can learn from it.
The big picture on top 2015 hedge fund performances
Hedge funds with an Asian-Pacific focus have generally outperformed the rest posting an average 9.1% return over the 12 months ending in October. That's a bit surprising, given the bloodbath seen in the Chinese markets in July and August, but it speaks to the myriad opportunities across the region.
From a strategy perspective, relative value funds performed the best among common hedge fund strategies, returning 5.63% versus the overall average 3.1%. The S&P 500 has declined 0.4% year to date.
Among these winning trends, the Segantii Asia-Pacific Equity Multi-Strategy Fund and Passport Capital's Special Opportunities Fund epitomize key traits of the top stock pickers in 2015. Not only are the two great case studies for what worked this year, but taken together they also offer an important lesson to non-professional investors
Segantii Asia-Pacific Equity Multi-Strategy
For Simon Sadler, chief investment officer at Segantii's Asia-Pacific Multi-Strategy Fund, the key differentiator this year has been the fund's diverse approach to trading the markets, as well as anticipating and avoiding the steep losses during this summer's Chinese selloff.
In a 2008 interview with EurekaHedge, Sadler explained that the fund's core advantage over other Asia-specific funds was that "each of [the fund's] strategies has individual strengths for different parts of the market cycle, enhancing [the fund's] ability to generate absolute returns. [The fund has] the advantage of being able to stay nimble and capitalize on short-term opportunities."
In other words, other funds limited to just short or long positions were handcuffed as the markets roiled in July and August. Sadler and his team, on the other hand, were able to seize on the volatility as an opportunity, react quickly to a fast-changing environment, and allocate resources in an optimized way based on market conditions. The fund had the tools and the ability to respond fast, and the management team successfully executed.
As a result, the fund was up 34% through October, while many of its competitors were down by double digits.
Passport Capital Special Opportunities Fund
Led by John Burbank, the Passport Capital Special Opportunities fund was up 21.5% through October, an impressive number in any market.
Burbank, a common guest on business TV channels and other media, has staked his 2015 investments on his thesis that an emerging market-led crisis is on the horizon. Unlike the financial crisis and Great Recession beginning in 2008 and 2009, Burbank predicts that the next crisis will be one of market liquidity, more similar to what was seen in the Asian financial crisis in 1997.
Based on that thesis, when the Asian markets led a worldwide drop in equities over the summer, Burbank and Passport Capital were well positioned to profit.
The world of special opportunities is not without risk, though. The fund declined 11.8% in October, wiping out a huge portion of an otherwise exemplary year.
A rising tide lifts all boats, which is great as long as you actually have a boat to float in
In both of these examples, the top-performing hedge funds of 2015 were better positioned for this summer's volatility and better equipped to make rapid, educated changes to their respective portfolios as the market lurched.
It only makes sense that when a large global event has an outsized impact on the markets over a period of time, the investors who perform the best will be those with a portfolio designed to take advantage of that specific scenario and the resources to navigate the event successfully. John Paulson, for example, became a household name in 2008 and 2009 as one of the few investors to play massive short bets on the subprime housing market. He made a mint on that bet, while nearly every other investor lost his shirt.
For everyday investors like you and me, though, anticipating and positioning our portfolios for events like these is a futile effort. We simply don't have the capital, research, or access to manage our money like Simon Sadler, John Burbank, or John Paulson.
Instead of focusing on beating the market from one year to the next, predicting the next major move, or even trading your stocks at all, focus on a passive, ultra-long-term investing strategy.
Over that decades-long time horizon, major events like this summer's volatility are smoothed over and don't have nearly the same impact on your returns. Don't try to predict the future; invest instead in great companies with the staying power and vision to last as long as you do.