UK hedge fund Gladstone wrongfooted by powerful market rotations

Gladstone Capital, one of Europe’s top-performing hedge funds of recent years, has been hit by a rebound in stocks that suffered early in the pandemic, the latest sign of how many managers are struggling to navigate 2021’s market swings.

London-based Gladstone, which manages about $2.7bn in assets, lost 10 per cent in the first quarter of this year, according to people familiar with its performance. It recovered 5 per cent last month, leaving it down roughly 5 per cent for the year, the people said. The MSCI World index of global developed market equities rose 9.3 per cent in the year to April 30.

Gladstone declined to comment.

The hedge fund industry overall has posted a strong start to the year, gaining 6 per cent in the first quarter in the best annual debut since before the financial crisis, according to HFR.

But behind the headline numbers, which were skewed by the performance of some smaller funds, many managers are posting far more mundane returns as they struggle to cope with gyrations under the surface of the market caused by an improving global economic outlook.

Some, such as London-based Sandbar Asset Management, have been hit as many stocks this year have failed to rally in response to strong earnings numbers or improving earnings expectations.

In fact, US and European companies that have posted better than expected first-quarter results have barely outperformed markets on the day they were reported, according to research by Bank of America and Morgan Stanley.

Managers’ stock picks have actually lost investors money this year and have performed much worse than the average over the past 10 years, according to data from Morgan Stanley.

“I think they [hedge funds] are finding it tricky,” said Graham Secker, Morgan Stanley’s chief European equity strategist. “Everyone is struggling for new ideas, long or short.”

Gladstone, a low-profile firm set up by former Lansdowne Partners equity analyst George Michelakis in 2005, had posted gains of about 23 per cent last year, 14 per cent in 2019, 23 per cent in 2018 and 37 per cent in 2017, according to numbers sent to investors and a person familiar with the performance, ranking it among the world’s top equity funds over this period.

Gladstone lost 6 per cent during this January’s market volatility, when huge levels of buying by retail investors sent the price of GameStop and some other beaten-down stocks soaring, the person said. While the hedge fund did not have direct exposure to the most heavily-traded names, it was still hit in the wider market tumult.

Gladstone is the 13th most active short seller in European stocks, according to Breakout Point. It has also been wrongfooted as many stocks across the region have rallied on expectations that progress on coronavirus vaccinations will fuel a sharp rebound in earnings.

Shares it has been betting against, including litigation funder Burford Capital, software company Micro Focus International and digital payments group Network International, have all risen this year. The MSCI Europe index has increased 11 per cent since the end of 2020.

In January the Financial Times reported that partner Martin Stapleton, a leading fraud investigator and respected short seller, had left Gladstone.

laurence.fletcher@ft.com