Hedge fund Element to return $2bn after profiting in pandemic

Element Capital, one of the world’s biggest macro hedge funds, plans to return around $2bn of cash to clients, in the latest sign that some top-performing funds are limiting their size after a year of strong gains during the coronavirus crisis.

New York-based Element, which was set up by billionaire Jeffrey Talpins and which manages $18bn in assets, wrote to investors this week to say it plans to return the money early this year because it wants to focus on performance rather than gathering assets. It will be the second time the firm has returned money in little more than a year, after returning around $3.6bn at the end of 2019.

The fund, which made a prescient bet on the efficacy of the coronavirus vaccine late last year, has emerged as one of the hedge fund winners from the pandemic, gaining 18.8 per cent during a wild 2020 for markets, according to a person who had seen the numbers.

Hedge funds have become increasingly wary in recent years of growing their assets too much, after seeing the performance of a number of large funds suffer. Extra assets can mean higher management fees for the fund’s managers, but becoming too large is increasingly seen as hindering performance because it can make it harder for managers to sell out of positions quickly and easier for rivals to identify their trades.

Some in the industry point to Brevan Howard, once seen as the gold standard of macro investing for its record of making money every year, as suffering from excess size, after reaching around $40bn in 2013. It subsequently lost money in three out of the following four years, and assets plunged as low as $6bn.

Winton founder David Harding, whose hedge fund firm has suffered from poor returns and a slump in assets, recently wrote to clients to say that having fewer assets “may even turn out to be an advantage”. 

A number of top-performing funds are limiting investor access or slimming down. Izzy Englander’s Millennium Management has returned cash to investors, while in December Caxton Associates told investors it would shut its Global fund, which gained 42 per cent last year, to new money.

Element, which has been shut to new money since 2018, profited last year from the sharp rebound in markets, writing to clients on March 23, the same day the S&P 500 bottomed, to say equities looked attractive given the large amount of monetary and fiscal stimulus.

The fund made money from bets against European stocks, as markets sold off in September. It then wrote to clients on October 26 to predict that the BioNTech/Pfizer vaccine would stun investors with a 75-to-90 per cent efficacy, and to say it had become more bullish, according to an investor letter seen by the Financial Times.

Two weeks later the companies announced the vaccine had been found to be more than 90 per cent effective, prompting a fierce rally in many stocks.

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