How Hedge Funds Have Managed Market Turmoil with Jack and Max

Episode Summary

Executive Summary: The episode argues that hedge funds, especially large multi-strategy and global macro shops, held up better than many public perceptions suggest through Q1 and early April 2026 volatility, while event-driven and some trend strategies struggled. The hosts also connect these results to asset-allocator behavior, private equity fatigue, and the broader tariff-driven macro backdrop.

Main Topics: Hedge fund performance in Q1 and early April (Priority: 5/5): Discussion of Sitco and HFR data showing hedge funds broadly positive in Q1, with large funds outperforming smaller ones and some strategies holding up better than others. Multi-strategy and pod shop resilience (Priority: 5/5): Large pod shops and multi-manager platforms were highlighted as the strongest performers in aggregate, especially relative to market-neutral and global macro buckets. Selection bias in hedge fund commentary (Priority: 4/5): The speakers argue that public perception is skewed toward smaller, equity-focused, often value-oriented managers because their letters are easier to access and more readable. Strategy dispersion and risk management (Priority: 4/5): Hedge fund returns varied widely by strategy, with event-driven, relative value, and trend-following areas seeing pockets of weakness, while long-vol and some macro funds benefited from volatility. Private equity liquidity and endowment selling (Priority: 4/5): Yale and Harvard’s reported selling of private equity stakes was framed as a signal of possible fatigue in private markets and as a move driven by both liquidity needs and tactical timing. Tariffs, volatility, and macro positioning (Priority: 5/5): The conversation closes with a broader macro view: tariffs, de minimis changes, Japan flows, gold, Bitcoin, and volatility are shaping market positioning and could drive further dispersion.

Key Arguments: Hedge funds were net positive in Q1 despite weak equity markets; the median return was positive and weighted returns were stronger, showing the industry broadly protected capital. Large funds outperformed smaller funds in Q1, contradicting the common narrative that smaller, capacity-constrained managers always have the best opportunity set. Public hedge fund letter coverage is biased toward accessible value/growth managers, while the biggest and most relevant institutional shops are often opaque and quantitative. Multi-strategy/pod shops likely rely heavily on equity market-neutral trading but increasingly add credit, macro, and other relative-value strategies, making them harder to categorize but still resilient overall. Event-driven and merger-arbitrage-style strategies suffered when volatility widened spreads and reduced leverage capacity. Private equity may be nearer a local top in popularity: sophisticated LPs are selling or co-investing selectively, while new money is increasingly coming from retail/private-wealth channels and employee-ownership structures. The market’s direction depends heavily on tariff policy; if tariffs remain severe, equities could face more downside, but moderation or deals could trigger a strong rally. Japan-related flows may be an important clue in Treasury and FX moves; there is early evidence that Japanese private-sector investors sold foreign bonds and increased foreign liabilities during the turmoil. Many managers can be right on macro views but still fail on execution; trading skill and risk control are separate from thesis accuracy.

Data Points: Median hedge fund return (Q1): 0.6% - Sitco report for hedge funds through the first quarter. Weighted average hedge fund return (Q1): 2.8% - Sitco report, showing larger funds drove better aggregate results. Median return for funds over $3B AUM: 2.3% - Sitco Q1 breakdown by asset size. Median return for funds $1B-$3B AUM: 1.6% - Sitco Q1 breakdown by asset size. Median return for funds $500M-$1B AUM: 0.6% - Sitco Q1 breakdown by asset size. Median return for funds $200M-$500M AUM: 0.4% - Sitco Q1 breakdown by asset size. Median return for funds under $200M AUM: 0.5% - Sitco Q1 breakdown by asset size. Weighted average return for funds over $3B AUM: 4.6% - Sitco Q1 breakdown showing largest funds drove outperformance. Weighted average return for $1B-$3B AUM funds: 0.8% - Sitco Q1 breakdown. Weighted average return for multi-strategy funds: 4.7% - Sitco Q1 strategy-level performance. Weighted average return for global macro funds: 4.5% - Sitco Q1 strategy-level performance. Event-driven strategy return: -2.8% median; -3.4% weighted average - Sitco Q1 strategy-level performance. HFR overall absolute return index (mid-April through Apr. 15): -42 bps - HFR mid-April update. HFR macro index (through Apr. 15): -3.96% - HFR mid-April update. HFR event-driven index (through Apr. 15): -89 bps - HFR mid-April update. HFR equity market neutral index (through Apr. 15): +11 bps - HFR mid-April update; discussed as a proxy for multi-strat/pod shop core exposure. HFR relative value multi-strategy index (through Apr. 15): -70 bps - HFR mid-April update. HFR fixed income convertible arbitrage index (through Apr. 15): -79 bps - HFR mid-April update. NASDAQ move (through Apr. 15): -2.75% - Benchmark comparison during April volatility. Pierre Andurand fund performance: -52% YTD - Example of a hedge fund with a large loss during the turmoil. Systematica trend-following fund performance: -18.8% YTD - Example of a trend manager struggling in the volatile period. Yale private equity sales: $6 billion - Referenced as the university endowment selling private-equity stakes in the secondary market. Tariff threshold for de minimis imports: <$800 - Chinese imports under this threshold had been exempt; the exemption was set to end on May 2. Tariff rate on China: 145% - Used in the discussion of extreme tariff scenarios and their effect on shipping and retailers. VIX / short-term VIX futures: ~24 - Cited as evidence that volatility expectations were still elevated. Japan foreign bond selling week: Large selling week ending Apr. 4 - Japanese private-sector investors were said to have sold a lot of foreign bonds during the market stress.

Pivotal Quotes: "The median return for hedge funds through the first quarter of the year was 0.6%." — Max: Summarizing Sitco’s Q1 hedge fund performance data. "The largest hedge funds, like overwhelmingly shows that they perform better." — Max: Making the case that large managers outperformed smaller ones in Q1. "The data for this quarter ... does not bear that out and that the largest fund actually performed the best, that actually the smaller funds performed the worst." — Jack: Responding to the common belief that smaller funds have the best opportunities.

Implications: Listeners should not generalize hedge fund performance from public letters or social media. Large multi-strats and macro shops have held up relatively well, but strategy dispersion is wide. Tariffs, private equity liquidity pressure, and volatility may keep rewarding skilled risk management over simple market beta.