Years ago, Warren Buffett placed a bet that in the decade spanning from 2008 to 2018, a simple, low-cost S&P 500 index fund would outperform a collection of hand-picked hedge funds, net of fees. Buffett won that bet, pocketing $1 million and putting another feather in the cap of passive investors worldwide.
However, in 2022 the opposite dynamic played out. While the S&P 500 lost 19.4% on the year, hedge funds as a whole handily outperformed. According to the Barclay Hedge Fund Index, which tracks the net returns of more than 3,000 funds, hedge funds as a whole shed just 8.2% in 2022.
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This outperformance during a bear market explains why some millionaires and high-net-worth investors choose to put their money in hedge funds despite the exorbitant fees: an ability to deliver uncorrelated, positive expected returns with lower volatility, regardless of how the market is moving.
However, not all hedge funds are built the same. The Barclay Hedge Fund Index is a simple arithmetic average of the net returns of the industry. Some funds have managed to distinguish themselves, usually with a long track record of strong performance or by accruing high assets under management, or AUM. Here’s a look at five of the top hedge funds in 2023:
— Bridgewater Associates LP
— Renaissance Technologies LLC
— Citadel LLC
— Pershing Square Capital Management
— Elliott Investment Management LP
Bridgewater Associates LP
Founded in 1975 by Ray Dalio, Bridgewater Associates is known for its mastery of the “global macro” style of investing, which uses a top-down approach focused on predicting, interpreting and betting on large-scale macroeconomic and geopolitical events. The firm is also known for pioneering the “risk parity” approach, which aims to balance contributions to risk between different assets in a portfolio.
One of Bridgewater’s most famous strategies, dubbed an “all weather” strategy, is a portfolio designed to deliver superior risk-adjusted returns across all economic and market environments. Another noteworthy feature of Bridgewater is its corporate culture, which Dalio characterizes as relying heavily on “radical transparency.” According to Bridgewater, its competitive edge comes from a culture that encourages accountability, frank communication and open criticism, dispensing with the usual corporate niceties and etiquette.
With about $123 billion in AUM as of Jan. 31, Bridgewater is reportedly the largest pure hedge fund in the world. However, its size hasn’t kept it from putting up stellar returns: Its flagship fund Pure Alpha II rose 7.8% in the first 11 months of 2022 — even as Wall Street was suffering through a bear market that saw the S&P 500 lose 14.4% over the same period.
Renaissance Technologies LLC
Renaissance Technologies was founded in 1982 by James Simons with a highly quantitative focus. Consistent with Simons’ background as an MIT- and University of California-Berkeley-educated mathematician and his stint with the National Security Agency as a codebreaker, Renaissance relies heavily on quantitative trading, sifting through large amounts of market data to capitalize on trends and exploit inefficiencies. Its most well-known and profitable fund, the Medallion Fund, was established in 1988.
Medallion Fund’s performance has been nothing short of legendary and borderline unbelievable. The fund reportedly grew at a compound annual growth rate of 62% between 1988 and 2021, or a 37% annualized rate after the hefty fund management fees. Even the returns net of fees would have turned every $1 invested in the fund in 1988 into more than $40,000. For comparison, every dollar invested in the S&P 500 in 1988 would’ve turned into less than $20 by the end of 2021.
The performance has been so unusual and noteworthy that Bradford Cornell, professor of financial economics at the University of California-Los Angeles, concluded in a 2019 paper: “To date, there is no adequate rational market explanation for this performance.” Unfortunately, Medallion has long been closed to outsiders, and it is currently limited to current and former Renaissance partners.
[SEE: 9 Highest Dividend-Paying Stocks in the S&P 500]
Citadel LLC
Led by billionaire Ken Griffin, Citadel’s investment strategies span five categories: equities, fixed income and macro, commodities, credit and convertibles, and global quantitative strategies. A notable feature of Citadel is a heavy focus on risk management as a core discipline, with a dedicated “risk management center” running stress tests to evaluate the impact of potential trades on Citadel’s portfolios. In 2022, Citadel’s flagship Wellington fund surged 38% in a bear market, posting its best year on record.
The Wellington fund has reportedly followed that performance up with a 7.2% gain in the first half of 2023, outperforming the broader hedge fund industry, which was up 4.4% year to date through July 12, according to the Barclay Hedge Fund Index.
Pershing Square Capital Management
Founded in 2004, Pershing Square is a prominent hedge fund founded by Bill Ackman, a renowned financier colloquially known as “baby Buffett.” Typically running a highly concentrated portfolio of 10 stocks or less, the hedge fund operates a long/short strategy, meaning it both buys and holds stocks and engages in short selling, betting that the price of certain stocks will go down.
Ackman is an “activist investor,” meaning that he’ll engage in campaigns to make changes to companies he’s invested in in order to juice up short-term returns. He has agitated for change at companies like Wendy’s Co. (ticker: WEN) and McDonald’s Corp. (MCD), and was famously an outspoken critic holding a major short position in Herbalife Ltd. (HLF).
The fund has built up an impressive record of returns over the years, and has posted year-to-date gains through the end of September of 11.7%, handily outperforming the wider hedge fund industry’s 3.3% return over the same period.
Unlike the other hedge funds on this list, investors can actually invest in this fund, which trades on the London Stock Exchange under the ticker PSH. As of Sept. 30, the shares traded at a massive 37% discount to their net asset value, and the fund has been buying back its own stock to take advantage of the situation. The business announced a $100 million stock buyback program in June to take advantage of this extreme discount.
Elliott Investment Management LP
Elliott Investment Management was founded by Paul Singer in 1977 and had grown to $59.2 billion in assets by June 30, 2023. Currently, the fund offers eight different categories of core strategies, which include equity-oriented, private equity and private credit, distressed securities, non-distressed debt, hedge/arbitrage, real estate-related securities, commodities trading, and portfolio volatility protection.
A prominent activist investor, Elliott took a large stake in enterprise software giant Salesforce Inc. (CRM) in January, seeking to nominate several new members to its board of directors in order to directly agitate for change and boost the share price. Just two months later, in March, Salesforce and Elliott announced that Elliott would no longer be seeking to nominate directors, as the company had put together an impressive growth plan and list of “transformation initiatives” that Elliott was happy with. So far, that approach appears to be working: CRM stock is up 50.7% year to date through Oct. 3.
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5 of the Top Hedge Funds in 2023 originally appeared on usnews.com
Update 10/04/23: This story was previously published at an earlier date and has been updated with new information.
