Family Feud: Small number of hedge fund family trees beat the market
Lately we’ve heard how the famed ‘Tiger Cubs’ underperformed the market…but here’s who didn’t
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You don’t just wake up one morning as the founder of a successful hedge fund. The story for many in that big chair is they put in years of apprenticeship at a more established firm before striking out on their own. As their children become rising stars, the older fund is within its rights to recruit talented young professionals by touting their alumni and which firms they founded.
The Novus Platform℠ has been tracking the progeny of many seminal hedge funds—with 13F data dating back to March of 1999—and here’s what we found: Most of them should stop bragging. Others might be justified if they bragged more. We took a look at 102 parent firms and calculated the trailing three-year annualized alpha of the funds they spun off.
For the purpose of this analysis, we’re not talking about “fund families” in the traditional sense of various funds under one organizational umbrella. We’re strictly referring to funds’ pedigrees—where their founders developed their craft. The parent funds are also not included in our analysis. We also filtered out the “parents” on our list which produced only two “children.”
Our title here of course comes from the classic US game show, Family Feud. So without further ado, which hedge fund families have the best three-year alphas? Survey says…
Eton Park and Highbridge also had net positive alpha for the period. Beyond these, the other proud dynasties of the hedge fund world all posted negative alpha for the period of June 2019 – June 2022.
So what can we conclude about the families who made the scoreboard? The security selection contribution from their long books added value over-and-beyond that of the general market and the sector in which they were investing. For the full recap on how we calculate alpha, you can read about our proprietary Novus Framework attribution tool.
It’s worth admitting that the analysis period started just before Covid-19, and ends in the bear market in which we find ourselves in today—brutal stuff. Therefore, we might suggest there is a common double-recessive pseudo-genetic trait at play, inherited from these parent to their offspring: the ability to pick names that outperform through periods of volatility.
The York Capital Family
York Capital Management was founded in 1991 by Jamie Dinan, most famous for being confused—undeservedly—with Jamie Dimon. After brief sojourns at Kellner DiLeo then Donaldson, Lufkin & Jenrette, Dinan struck out on his own. His former DLJ chums staked him $3.6 million, which he has parlayed into a fund with $6.3 billion in assets under management as of the Q2 2022 13F filing. Oh, and he owns a piece of the Milwaukee Bucks.
What really distinguished the Yorks was its Pacific Rim affiliate, York Capital Management Asia (HK) Advisors, which generated 3793 bps of alpha on its own (from June 2019 – June 2022). Spun off late last year with York veteran Masahiko Yamaguchi staying on as investment chief, it has focused on technology plays in emerging markets. Data center developer GDS Holdings and ag-tech name Pinduoduo are among its biggest winners, but there’s no mistaking the contribution of materials maker Daqo New Energy with its 46% return on invested capital (as of June 2022).
London-based Nekton Capital, headed by Christophe Aurand, also faced smooth sledding. Nekton also invests in the struggling Health Care sector, but one of its biotech picks, Qiagen, got hot. That Qiagen is based in the Netherlands is not insignificant; Nekton has a judicious balance of American and European names in its portfolio. It also made smart bets on Aspen Technology and Monster Beverage.
Other Hedge Fund Family Highlights
TPG-Axon’s descendants were nowhere near as successful as the mother firm over the past three years. That’s surprising considering how TPG-Axon seems to have been white-knuckling it all this time—shifting from financials to cyclicals and from microcaps to mega-caps.
The Elliotts should be proud of the work done at Palliser Capital, where a canny investment in Activision Blizzard offset a lot of other ones that haven’t quite panned out.
The bright spot among the Putnams was Hellman, Jordan Management. Its well-placed wagers on Xpeng and Salesforce were most accretive, and yet its strongest contribution was from the Proshares ETF for shorting the S&P 500.
The Omegas were best represented by Elm Ridge, with its appetite for mid-caps in the Energy sector. In this case, though, positive alpha merely means less negative overall returns. The best part of Elm Ridge’s portfolio was the Russell 1000 Growth iShare.
The Greenlights owe much of their bragging rights to AREX Capital Management, which made sound investments in Post Holdings and Fiesta Restaurant Group.
The Bains’ shining star was small-cap fund 325 Capital, which picked winners in American Public Education and Astronomics.
The TCI family’s favorite kid must be Theleme Partners, which placed a big bet on India-based JSW Steel; this paid off with a 753 bps contribution from June 2019 – June 2020.
What’s in a name?
Let the record show: We’re making zero comment on whether lineage ought to be a primary criteria for asset owners when assessing new managers. However, there has certainly been some interesting chatter from academics on the subject. In 2020, we collaborated with researchers Nimesh Patel and Tray Spilker from the University of Hawaii, who have found that unanimous trades that happen across a family of fund managers can point to alpha to the tune of 7% per year, after stripping out most common risk factors. At the very most, perhaps it’s worthwhile to keep track of who is likely to talk shop with whom.
For those who wish to explore the full list families who we track, you can do so here:
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All quantitative data in this piece is as of June 30, 2022. Information provided by SEI through its affiliates and subsidiaries. This information is for educational purposes only and should not be considered investment advice.
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