Hedge Funds Have Decent January, Despite GME

GameStop was one of the most shorted hedge funds names coming into January. And last month's epic short squeeze that we wrote about (here, here and here) cost a number of big-name funds, like Melvin Capital, D1 and Point72, bigly--as they say. 

The S&P 500 was flying high up to the week of the squeeze. The equity benchmark was up 2.6% through Jan 25, before closing the month down 1.1%. So, we figured the pain would be felt broadly across hedge fund land...but, so far, Jan HFRI hedge fund returns suggests the damage was limited to a select group of funds with the HFRI Fund Weighted Composite Index, the widely cited hedge fund benchmark, up 0.78%. 

So, most hedge funds did well last month, at least the ones reporting early! Perhaps because it wasn't just WSB driving up the GME price, other hedge funds were in it too, amplifying the rally. (And, of course, Robinhood's liquidity issues shut out retail investors for a time which helped hedge funds.) True, the HFRI Equity Market Neutral Index was down 0.53%, but given this leveraged strategy is one of the most vulnerable to short squeezes, we're surprised (shocked even!) that losses were so...umm, pedestrian. Well, in any case, good for you hedge funds! You came out of a difficult month in good shape. 

Venn has a good recap of the factors that drove equity returns and, of course, Crowding was the biggest driver (click to enlarger).

As shown, the Equity factor was down 0.17% on the month. It was actually up 3.5% through Jan 25 on good vaccine news, but gave all of that back and more in the last week. And there was a LOT that went on within the Equity factor. First, Crowding had its worst month on record--of course! Hedge funds often herd into the same names on both the long and short sides...because differentiated strategies are,  well, rare...and there was broad degrossing in the last week of January. 

In a short squeeze, some things have to go up...and the Small Cap factor had one it best months ever (94th percentile) gaining 3.4%. Small Cap and lower quality/ higher risk stocks are often the most shorted, so makes total sense. Conversely, Low Risk stocks on the long side would have been sold in a short squeeze (because you know, (i) margin calls, and (ii) "hedge" funds...need to be hedged) and that factor had a big down month (11th percentile).

Separately, Macro factors related to inflation-expectations, also had a great month. The Inflation factor rose 2.1% (90th percentile) and the related Commodities factor gained 1.8% (84th percentile) on rising energy and agriculture prices. Interestingly, Macro hedge funds had a mundane Jan, the HFRI Macro Index was up 0.23%--either funds were split on inflation expectations or just hadn't put on a lot of risk for some reason. 

All in all, a good start to 2021 for most hedge funds.