This Month’s Hedge Fund Performance Shows Significant Improvement From Q3

Smaller funds also seem to be outperforming larger funds in the long run.  


Hedge funds have seen a lot of ups and downs in the past few months. According to Citco’s recent report, the company’s hedge fund clients delivered an overall weighted average return of 1.15% in the third quarter of 2021, compared with weighted average returns of 6% in the second quarter and 8.25% in the first quarter.

The Q3 downturn seemed to come primarily from less impressive returns in July and September, according the HFRI index, which compiles data on the performance of all hedge funds with at least $50 million under management. Funds with more than $10 million in assets under management (AUM) and at least 12 months of active performance are also tracked in the index.

However, October’s numbers seemed more promising, with both the fund-weighted HFRI and asset-weighted HFRI showing approximately 1.4% returns.

Don Steinbrugge, chairman of Agecroft Partners, a consulting firm that focuses on hedge funds, said the reason for the relatively lackluster Q3 performance was overall mediocre performance among stocks and bonds. “Big global equity markets were down, with the S&P down 0.6%,” he said. “And the fixed-income markets were flat. Therefore, the industry didn’t get the data tailwind.”

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In the past five years, there has been a growing divergence between the performances of  larger and smaller hedge funds, and that trend seems to be continuing this year. For 2021, the HFRI, the leading hedge fund performance index, is showing a significant gap between its asset-weighted index—which is weighted according to the AUM reported by each fund for the prior month—and its fund-weighted index—which includes all single-manager HFRI index constituents. The data through October shows the asset-weighted index logging an annualized return of 7.7%, while the fund-weighted index has seen returns of 11.22%. The gap was even larger in 2020, when the asset-weighted index returned only 2.19% while the fund-weighted index returned 11.83%.

Steinbrugge said he believes many of the larger hedge funds are struggling because they have difficulty optimizing such vast portfolios.

“Many have grown their assets well beyond the optimal size to maximize performance,” he said. “And, as a result, their alpha is diluted over a large asset base, which has negatively impacted performance.”

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Digital Token Registrations Shut Down by SEC

American CryptoFed allegedly filed misleading forms while trying to register Ducat and Locke as securities.


The US Securities and Exchange Commission (SEC) has filed administrative proceedings against a Wyoming-based decentralized autonomous organization (DAO) to stop the firm from registering two digital tokens as securities.

The SEC alleges that American CryptoFed filed a materially deficient and misleading registration form in an attempt to register as equity securities two digital tokens known as the “Ducat” and “Locke” tokens. 

The regulator’s enforcement division alleges that American CryptoFed’s Form 10 registration failed to contain required information about the two tokens, as well as about the company’s business, management, and financial conditions, including audited financial statements. 

The form also allegedly contained inconsistent statements about whether the Ducat and Locke tokens are securities, as well as American CryptoFed’s intention to distribute its Locke tokens to the public. The SEC said the company used a Form S-8, which is used for securities offered to employees through employee benefit plans, without disclosing that the Locke tokens may not legally be distributed pursuant to a Form S-8.

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According to the SEC’s complaint, staff from its Division of Corporation Finance spoke with American CryptoFed representatives on Oct. 4 and explained that the Form 10 was materially deficient. They suggested that the company amend the form to correct the deficiencies or consider withdrawing it. Two days later, according to the complaint, American CryptoFed filed a document that purported to be an amended Form 10 asserting that the Ducat and Locke tokens were not securities.

“The amendment did not address any of the identified material deficiencies,” said the SEC.

The SEC said in a letter to American CryptoFed that the form stated throughout that the Ducat and Locke tokens were not securities; however this was inconsistent with a cover page statement identifying the Ducat and Locke tokens as securities to be registered pursuant to Section 12(g) of the Exchange Act.

“Issuers attempting to raise money from the public must provide the information necessary for investors to make informed decisions,” Kristina Littman, chief of the SEC Enforcement Division’s Cyber Unit, said in a statement. “We allege American CryptoFed made materially misleading statements and failed to provide legally required information in its registration form.”

The administrative proceedings are intended to determine whether to deny or suspend the effective date of American CryptoFed’s registration of the Ducat and Locke tokens in order to protect investors. The firm’s registration of the two tokens is stayed until an administrative law judge makes a decision.

In 2019, the SEC’s Office of Investor Education and Advocacy issued an investor alert warning investors to be wary of claims that the SEC has approved offerings. The agency cited situations in which initial coin offering (ICO) sponsors touted SEC forms and filings as indications that the investment has been “approved” by the SEC. The regulator cautioned that just because a company makes a filing on its database does not mean it has been approved.

American CryptoFed was launched in July by California-based software firm mSHIFT Inc. The company did not respond to a request for comment on this story.

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