What do the world’s top hedge funds have in common? The answer, oftentimes, is surprisingly little.
Some of the obscure investing entities, which tend to limit access to institutions and high-net-worth individuals, specialize in betting on macroeconomic trends, while quantitative hedge funds use advanced computer models to trade the market based on historical data and advanced algorithms. Still others engage in activist investing, taking large positions in companies and agitating management to make certain moves that will benefit shareholders.
But while hedge funds are occasionally immortalized on film or romanticized in financial media, in truth, retail investors should count their lucky stars that they don’t qualify to participate in this unique corner of Wall Street. That’s because of one common denominator hedge funds of all shapes and sizes do share: They charge enormous fees.
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In a world of no-fee exchange-traded funds and index funds and plunging expense ratios, hedge funds often charge clients an annual fee of 2% of assets under management and 20% of gains that reach a certain threshold. In aggregate, these fees don’t seem justified by the accompanying returns, with hedge funds as a whole regularly trailing the returns anyone could get buying an S&P 500 index fund and forgetting about it.
That said, there are some notable exceptions in the field, and the best hedge funds in the world are massive, time-tested, market-beating machines. Here’s a look at five of the top hedge funds in 2022, and some of the strategies they use:
— Renaissance Technologies LLC (Medallion fund).
— Bridgewater Associates.
— Man Group Ltd. (ticker: EMG.L).
— Citadel LLC.
— TCI Fund Management Ltd.
Renaissance Technologies LLC (Medallion Fund)
Perhaps the most enigmatic and impressive hedge fund on Wall Street is Renaissance Technologies’ Medallion fund, which from 1988 to 2018 clocked annualized returns of 66%. After fees, those annualized returns were still remarkable, at 39%.
And, unlike the typical “2 and 20” that hedge funds charge, the Medallion fund has been able to put up these incredible numbers while charging 5% of assets under management and 44% of gains. In only one year, 1989, did the fund lose money.
So what exactly is its secret? The specifics of the strategy aren’t elucidated — one is always tempted to guard one’s golden goose — but Renaissance’s Medallion fund is a quantitative fund that uses troves of data, tested mathematical models and algorithms that dictate how capital is deployed.
The fund, founded by Jim Simons, got a head start on rivals with this “quant” strategy. Simons was a veritable mathematical genius who, prior to founding arguably the most successful hedge fund ever, achieved breakthrough discoveries that would lead to the development of string theory.
Don’t get your hopes up on getting into the Medallion fund, however: Participation is limited to insiders at Renaissance. In 2021, Medallion returned 48%, and Jim Simons was the top-earning hedge fund manager in the world, hauling in $3.4 billion.
Bridgewater Associates
Bridgewater is the world’s largest hedge fund, with about $150 billion in capital. Since its founding in 1975, Bridgewater has returned $52.2 billion in gains to its investors — more than any other hedge fund on the planet.
Like Renaissance, Bridgewater is another firm with a strong, iconic founder: Ray Dalio. Dalio, who founded the firm out of his apartment in 1975, has fostered a unique and somewhat controversial work culture at the Westport, Connecticut-based company, characterized by what Dalio calls “radical transparency.”
[SEE: Billionaire George Soros’ 7 Top Stock Picks in 2022.]
At a high level, this boils down to a work environment characterized by extremely frank conversations, where social etiquette is eschewed in favor of what Dalio sees as a more efficient, productive and honest way of doing business. Employees have to embrace accountability and confronting one’s own strengths and weaknesses to succeed at Bridgewater, where Dalio has tried to foster a pure meritocracy.
This environment, as outsiders have observed and Dalio admits, isn’t suitable for everyone, so there’s higher turnover as a result, which is accepted as a cost of doing business. Though harsh, it’s hard to argue with the results.
Like Renaissance, Bridgewater is a quant fund, and was an early mover in investing based on computer models and reams of data.
Man Group Ltd. (EMG.L)
Man Group has a somewhat longer track record than the other firms on this list. Its corporate ancestor, a brokerage, was founded in 1783.
Nominated by the international finance publication Institutional Investor for both institutional hedge fund manager of the year and most innovative hedge fund manager of the year for 2021, Man Group is the world’s largest publicly traded hedge fund. It manages more than $151 billion in total, about $97 billion of which is in the “alternative asset” category containing hedge funds.
Shares of the British asset manager trade on the London Stock Exchange, or LSE. Man Group trades under the ticker EMG on the LSE; pays a 4.5% dividend; and has handily outperformed the S&P 500 over the last 10 years, returning 357% to the benchmark’s 198% over that time.
Like other hedge funds, Man Group has various investment offerings under its umbrella, ranging from quant funds to long-only credit and equity strategies, illiquid private market investments and more.
Citadel LLC
Another one of the largest and most successful hedge funds in the world, Citadel saw its head honcho Ken Griffin bring in $2.5 billion last year, the third-largest haul among hedge fund managers. That figure came on the back of a solid year in which Citadel’s multi-strategy operation returned 26.3%.
Although that figure actually slightly underperformed the S&P 500’s 26.9% return for 2021, it’s impressive given that its various strategies run the gamut from stocks and bonds to commodities, macro and quant-focused offerings.
Citadel’s long-term track record is remarkable, with a 31-year annualized return of 19%, which far exceeds the U.S. stock market‘s long-term average return of closer to 10% per year. Citadel posted the second-largest total gains of any hedge fund in 2021, according to LCH Investments, hauling in $8.2 billion.
TCI Fund Management Ltd.
Another of the top hedge funds in 2022 is TCI Fund Management. While its brand might not be as well-known as Bridgewater or Citadel, it was the top earner among all hedge funds last year on an absolute basis, returning $9.5 billion.
Unlike the others on this list, TCI is characterized by an activist bent, meaning the long-only portfolio tends to be highly concentrated in a handful of stocks. Recently, Canadian Pacific Railway Ltd. (CP) and Canadian National Railway Co. (CNI) have been two of TCI’s largest holdings, with the latter agreeing in January to appoint two new independent directors to its board while tapping a new CEO after pressure from the hedge fund.
While activism is a far cry from quantitative strategies, TCI is quite good at its specialty, with 2021 returns of 23.3% marking the 13th-straight year of profits for the hedge fund.
That streak is the embodiment of the purpose that hedge funds are supposed to serve: posting positive returns, year in and year out, regardless of bull markets or bear markets.
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5 of the Top Hedge Funds in 2022 originally appeared on usnews.com
Update 04/27/22: This story was published at an earlier date and has been updated with new information.
