By Svea Herbst-Bayliss
BOSTON (Reuters) - Cinctive, a hedge fund that nearly tripled assets since its 2019 launch, is looking to capitalize on the market volatility stirred up by the Omicron variant of the coronavirus and worries over a hawkish shift from the Federal Reserve.
Among the areas the fund believes are attractive are financial companies, which should benefit from rising interest rates, according to people familiar with the firm’s thinking.
The fund also believes that energy companies' strong balance sheets will allow them to buy back stock and pay higher dividends -- making them an attractive option -- especially after a selloff in oil hit many of their shares -- the people said.
The S&P 500 is down nearly 4% since the day before Thanksgiving, when Omicron fears initially began roiling markets. The index is still up 22% for the year, near record highs.
Cinctive pursues a market neutral or risk minimizing strategy where teams of portfolio managers try to exploit price differences by being long and short equal amounts.
Its managers reacted to recent volatility by betting against stocks that would benefit from the economy reopening even though executives are not expecting a new lockdown in the United States. They moved to utility shares, consumer staples and other so-called defensive stocks.
Healthcare, energy and technology bets have helped the firm return 9% over the last 12 months, a person familiar with the fund said. The firm launched in September 2019 with $1 billion in commitments.
The benchmark HFRI Equity Market Neutral Index gained 6.2% in the first 10 months of the year. The market neutral strategy helps diversify portfolios and has been popular as a bond replacement strategy at a time of low interest rates.
November however was a tough month for hedge funds with early data from PivotalPath showing that the average fund lost between 1.6% and 2%, marking the worst performance since March 2020.
People familiar Cinctive's portfolio said it navigated the extreme volatility spurred by the initial wave of the coronavirus in March 2020 by having tracked supply chain issues and the health impact early and having cut risk dramatically.
While investors added fresh cash to hedge funds this year after taking money out in 2020, industry analysts at eVestment note that the pace of inflows has begun to slow in the last weeks.
Earlier this year Cinctive launched a risk arbitrage strategy and reunited with former colleague Mitch Nordon. Companies are now searching for weaker rivals and M&A activity in the United States alone surged 139% to $2 trillion in the first nine months of the year, Refinitiv data shows.
Cinctive founders Richard Schimel and Larry Sapanski, who previously ran Diamondback (NASDAQ:FANG) Capital Management, wanted to give their investment teams more flexibility and let portfolio managers invest in smaller companies, executives and investors said.
Some 70% of the firm's returns were generated from investments in small and mid-sized companies.
The firm now employs 50 investment professionals and a total of 70 people, up from 38 when the firm launched.