(Bloomberg) -- This was the year to ridicule hedge funds. Pension funds, politicians, Warren Buffett, even hedge fund managers themselves — they all had something to say about the disappointing performance, high fees and market saturation.
Well-known managers from Ray Dalio to John Paulson saw performance on their main funds range from flat to double-digit losses, while some distressed-debt investors like Jason Mudrick benefited from the rally in commodities prices. Strategies focused on macro trends and equity hedges — which have seen returns crimped by swollen stock-market valuations and ultra-low interest rates — produced the worst returns.
But as the year draws to an end, the industry's gotten an unexpected pick-me-up. The ripple across markets from the surprise victory of U.S. President-elect Donald Trump bolstered returns — reversing the fortunes for some — and may prove to be a boon going forward. With his policies expected to increase interest rates, produce a wider dispersion in earnings across industries and trigger more merger activity, hedge funds may soon be put back to work.
"The tide has definitely turned," said Adam Blitz, chief investment officer at Evanston Capital Management, which farms out money to hedge funds. "Since the election I've definitely sensed a bit of a change in attitude among folks who are saying, 'Boy, we don't know exactly what the future's going to hold, but it's unlikely to be more of the same."'
MACRO FUNDS DISAPPOINT
While hedge funds betting on macroeconomic trends had one of the worst-performing strategies in 2016, the volatility spurred by Trump's win changed the course for managers such as Brevan Howard Asset Management and Rubicon Fund Management. Brevan Howard's master fund rallied in November, erasing earlier declines and bringing returns for the year to 2.8%, an investor letter shows. Rubicon's Global Fund surged 21% last month, returning it to a profit of 2.2% from a loss, a person familiar with the matter said.
Some macro funds like Dymon Asia Capital (Singapore)'s $721 million Asia Currency Value Fund, which focuses on exchange rates and gold, benefited this year from bearish bets on the region's currencies — especially on the yen weakening against the dollar. That fund gained 22% last month and surged 45% this year through November.
Other marquee macro funds saw deep losses pared. The Pure Alpha II fund, run by Dalio's Bridgewater Associates, was down 10.3% at the end of September and has since surged, bringing losses through Nov. 30 to 0.2%, two people said.
The Trump era could "ignite animal spirits" and attract productive capital, Dalio wrote in a LinkedIn post on Monday. "If this administration can spark a virtuous cycle in which people can make money, the move out of cash (that pays them virtually nothing) to risk-on investments could be huge," he wrote.
Moore Capital Management's Macro Managers fund trimmed losses for the year to 1.23% through Dec. 1, a person said.
Moore's founder, Louis Bacon, said in a Nov. 28 letter to investors that he's "exceedingly upbeat" for the first time in several years about the "game-changing trading opportunities that lie ahead." Moore pointed to Trump's victory and the prospects for higher interest rates, a stronger dollar, booming corporate sector and improving market liquidity.
"The recent election in the United States has, in our view, launched nothing short of a sea change in the potential opportunity set for trading markets globally," Bacon said in the letter.
Long-short equity hedge funds produced big losers and winners. The strategy returned an average 2% in the first 11 months of the year on an asset-weighted basis, according to Hedge Fund Research.
In Europe the $9.2 billion Lansdowne Developed Markets Fund dropped 18% and Crispin Odey's flagship fund slumped 48%. His fund gained more than 20% in the two trading days after the U.K.'s June vote to exit the European Union, known as Brexit, but slipped after British stocks rebounded on a weaker pound.
"A number of managers were trapped by the selloff and sector rotation at the start of the year, while they failed to capitalize on post-Brexit rally due to lack of risk-taking," Nicolas Roth, co-head of alternative assets at Geneva-based investment firm Reyl & Cie, said of European hedge funds.
In the U.S., Blackstone Group LP's $1.8 billion Senfina Advisors lost 24% this year through November and John Burbank's Passport Capital saw its Global Strategy fund decline 15.2% in the same period.
By comparison, New York-based Proxima Capital Management surged 14% in November alone, extending gains for the year to 44%, while the $1.2 billion Senvest Management surged almost 20% over the same period in its master fund, according to people familiar.
Distressed-debt hedge funds, mostly concentrated in energy-related bets, profited from the rally in oil prices this year, returning 12% on average. Mudrick Capital Management saw some of the biggest gains, soaring 35.5% through the end of November. The $13 billion Marathon Asset Management's Special Opportunity Fund rallied 18.5% and the main fund for the $21 billion Canyon Capital Advisors gained 8.3%, according to people with knowledge of the matter.
The LIM Asia Special Situations Fund, which has $304 million of assets, returned 10% through November, boosted by gains in high-yield bonds that recovered with commodities prices, according to chief investment officer George Long.
With corporate defaults bound to increase alongside interest rates, distressed-debt hedge funds look to remain strong with a wider range of opportunities arising in the next 12 to 18 months, said Panayiotis Lambropoulos, a money manager at the Employees Retirement System of Texas.
STOCK PICKERS RETURN
Next year stock-pickers, who struggled this year to stand out amid an almost all-encompassing equity rally, may also have their time to shine, according to David Saunders, chief executive officer at Franklin Resources' hedge fund investor K2 Advisors.
With Trump focusing on deregulation and the repatriation of overseas cash, companies may step up stock buybacks, capital expenditures and takeovers, Saunders said. Changes to Obamacare, trade deals and infrastructure spending will impact the health-care, technology, steel and mining industries, he said.
"We've got some proposals on the table in the Trump administration which present potential opportunity," Saunders said at a Dec. 7 conference. "The best way to express that is through someone who has an ability to be long and short, go to cash, sit on the sidelines and move nimbly through the market."
Across strategies, the environment will favor smaller, specialized hedge funds over larger, more generalized ones, said Evanston's Blitz.
"It's all about finding the really good ones who have a real edge in a particular area," said Blitz. "I still don't think that, even with that better backdrop, the average hedge fund is going to perform particularly well."