Lex: Hedge funds: choose your fighter

Element Capital made a precise and impressively prescient bet on the efficacy of the Pfizer/BioNTech vaccine. Photo / AP

OPINION:

Pundits on pandemics and politics have supplied copious analysis of late. Wall Street researchers are not far behind. Analysts have written with plausible fluency on seroprevalence rates and poll intentions of Pennsylvanians. Polarised outcomes for public health have given hedge fund managers the chance to bet big.

Element Capital made a precise and impressively prescient bet on the efficacy of the Pfizer/BioNTech vaccine, believing that the injection would be at least 75 per cent effective. The vaccine exceeded the 90 per cent mark in advanced trials. Equity markets soared on Monday when the news was announced.

After a placid six months, the Vix volatility index spiked to levels in October almost double prior lows. The S&P 500 fell six per cent between mid-October and just before the November 3 US election.

During the 2010s, low volatility and slow growth almost made hedge funds obsolete. High fees and an inability to beat indices sent many industry legends into an early, involuntary retirement. Winners are now crowding back into the spotlight. In time big losers will emerge, less happily. But simply being perceived as relevant again may be good enough for prominent hedgies.

Dan Loeb's Third Point Capital made US$400m in profits betting on the US election, believing that the outcome would reassure the market. Sure enough, a Biden victory along with a likely divided government reassured investors that radical change was not coming.

Opportunity has again presented itself for one notable bear. Just before the market meltdown in March, Bill Ackman correctly guessed "hell [was] coming" pocketing nearly $3b on his trades. He ploughed those winnings back into long positions such as burrito chain Chipotle. His Pershing Square fund is up now 44 per cent for the year.

Mr Ackman thinks complacency has taken over yet again and is now betting against investment-grade credit. For reference, the riskiest corporate debt, junk bonds, are now yielding less than 5 per cent. He may have a point.

Diverging expectations for 2021 are growing, even if a divided Congress reduces the chances for political reform in the US. The course of the pandemic remains highly unpredictable. For hedgies, skilled in claiming they have unique and differentiated insights, the outlook is good. Even if incentive fees are uncertain, management fees can be taken to the bank.

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