Is Now The Time For Hedge Funds?

Hedge funds whose main areas of investment include currencies, bonds, stocks, and commodities have historically had trouble making consistent profits. A study by Bloomberg indicated that these “macro funds” have underperformed on the S&P 500 each year since the beginning of 2008. As it stands, it would seem like going into the market as an investment firm whose main area of expertise is currency would be a bad idea. Still, certain funds have thrived in the face of depressed interest rates and volatility. One such firm is the Lion Star Family Fund.
 
Founded in 2006, the New York City-based Lion Star Family Fund has operated as a private family office for 8 years. In 2014, they decided to open their investment opportunities to the public with a British Virgin Islands based hedge fund offering. Their three main areas of investment are currencies, the indices of other countries, and commodities like metals. Although the market for such investment has been relatively small, the Lion Star Family Fund made decidedly consistent gains in their first 8 years of operation.
 
Impressive Returns are not the Norm
In 2006, the family firm started with an initial investment of $500,000. By 2008, they had over a million dollars in assets to work with. Of course, the heat of the Great Recession was felt in its full force in 2008. Central banks fluctuated and depressed interest rates making currency trading difficult. Still, the Lion Star Family Fund continued to perform well. 2008 saw a 47.3% return and the following year saw a 43.8% return. Again in 2010, the return was 48.6% for the Lion Star Family Fund, even while other currency-trading firms were struggling. They saw a slight dip in 2011 with a 41.4% return, but they were still working with $4.6 million in assets after only a few years. They returned to form with 47.1% and 48.9% returns in the following two years.
 
Despite the fact that the market increased in volatility during those years, the Lion Star Family Fund saw average realized returns of over 45%. They also increased their $500,000 initial investment to over $10 million.
 
Is Now the Time for Hedge Funds?
Some might say that if you’re working with currencies, commodities, stocks, or bonds, the market is not yet ready to support those types of hedge funds. But, it’s clear that the climate is changing to some degree. Steven Cho, a former currency trader at Goldman Sachs Group Inc. (NYSE:GS), decided to part ways with his former employer to create a hedge fund with an emphasis on the currency market. His view is that macroeconomic trends are looking up in his field. This is, of course, the same view that the Lion Star Fund holds and one of the major reasons why it’s opening its investment doors.
 
Beyond that, the number of hedge fund startups has been increasing steadily over the past few years. In the fourth quarter of 2013, there were 244 brand new hedge funds. 289 opened their doors in the first quarter of 2014. It’s clear that the tides are turning as more investors are looking for ways to enter the market.
 
Another reason that more investors might be willing to invest with startup hedge funds is the increased experience. Hedge funds aren’t being founded by fresh-faced college grads who require years of practice and proof to really impress investors. These hedge funds are being founded by industry professionals like Steven Cho and his Kings Peak Asset Management or Wuy Yen Liuw of Aravt Global (and formerly Ziff Brothers Investments).
 
Indeed, even funds like the Lion Star Fund that once operated exclusively as a family office are primed with experience and a record of solid success. It’s clear that investment firms and hedge funds are climbing out of obscurity. The market conditions are finally taking a turn for the best.