Finance
Commodity Hedge Funds Ruled With Massive Returns In 2022


In 2022, hedge funds struggled mightily amid macro factors like the war in Ukraine, the jarring return of persistent inflation, and the ensuing trend of rapidly rising interest rates around the globe. In many cases, most or even all asset classes plunged in step with each other, leaving fund managers with virtually nowhere to hide their investors’ capital.
A heap of coal. Photographer: Dhiraj Singh/Bloomberg
© 2023 Bloomberg Finance LP
The risk/ return profiles of virtually all major asset classes were altered, requiring managers to adjust their playbook. Those who could do so quickly outperformed managers who were set in their ways. In some cases, smaller funds were nimbler than their larger counterparts, which enabled them to adapt quickly.
According to HFR, total global hedge fund capital ended 2022 at $3.83 trillion, a quarterly increase of $44 billion.
Overall hedge fund returns
Hedge funds administered by the Citco group of companies recorded a weighted-average return of -7.02% for all of 2022. The median return of -2.86% demonstrates that smaller funds generally outperformed larger ones.
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More broadly, the HFRI 500 Index ended 2022 with a return of -3.37% after a fourth-quarter gain of 1.6%. The firm reported that globally, the leading hedge fund strategies were macro, including the sub-strategies of fundamental commodity, discretionary, and quantitative, trend-following CTA strategies.
The HFRI 500 Index broadly outperformed the equity and fixed-income markets and especially technology stocks — by 3,000 basis points, the widest margin since the index’s inception. The HFRI Weighted Composite Index returned 2.26% in the fourth quarter, trimming its full-year decline to 4.2%.
Unlike Citco’s report, HFRI reported that larger, more established hedge funds outperformed smaller ones in 2022, as evidenced by the 0.9% return for the HFRI Asset-Weighted Composite Index. As stated earlier, Citco’s 2022 report indicated that smaller hedge funds often outperformed their larger peers due to a much smaller median loss versus the weighted-average loss.
The soaring volatility and rising interest rates took bites out of hedge fund returns in 2022, but most funds protected investor capital from the worst of the market’s drubbings. 2022 was much more challenging for hedge funds than 2021 when funds generated a weighted-average return of 11.37% for the entire year.
Returns by strategy
There was a wide range of returns across hedge fund strategies, only two of which recorded positive performances in 2022. Commodities hedge funds were the standouts for the year overall, with a weighted-average return of 20.43% for Citco-administered funds and a 41.3% return for the HFRI 500 Macro: Commodity Index.
The median return of 12.33% for commodities funds was also the best of all major strategies and indicated that larger funds outperformed smaller ones. The only other hedge fund strategy in the green for 2022 was global macro, with a weighted-average return of 16.75% and a median return of 10.5% for funds administered by Citco.
On a global scale, the HFRI 500 Macro Index soared 14.2% in 2022 on the back of contributions from several sub-strategies, including commodities, currencies, discretionary, fundamental discretionary thematic, and trend-following CTA strategies.
The macro index outperformed technology stocks by over 4,700 basis points, also the highest margin since the index’s inception. Performance-based declines paired with net outflows in the fourth quarter resulted in total macro capital plunging $34 billion, ending 2022 at $677.6 billion for macro funds globally. However, for all of 2022, assets managed by macro funds rose $40 billion.
However, event-driven funds managed to eke out a positive median return of 3.81% despite being the worst strategy of all, with a weighted-average return of -18.64%. The significantly higher median return indicates that smaller event-driven funds smashed their larger counterparts.
The second-worst strategy was equities, with a weighted-average return of -11.19% and a median return of -6.44%. Multi-strategy funds were among the most popular based on investor flows. However, their weighted-average and median returns of -7.47% and 1.59%, respectively, were surely to blame for the sizable redemptions that balanced against the significant gross inflows recorded at different times in 2022.
Performance by size
The carnage in 2022 was spread across hedge funds of all sizes. Although the largest funds were the best performers in 2021, they were the worst performers in 2022. Funds with over $3 billion in assets under administration generated a weighted-average return of -8.55%, although their median return of 3.94% was the best of all the size categories.
The underperformance in larger funds was a critical factor in the size-related returns, just as it was among event-driven funds. After funds with over $3 billion in assets, the second-worst-performing size group included funds with $200 million to $500 million in assets, which returned -6.31% on a weighted-average basis. Their -0.62% median return again shows that larger funds significantly underperformed smaller ones.
The trend was also evident in funds with $1 billion to $3 billion in assets, which generated a weighted-average return of -5.61% and a median return of -0.04%.
Citco also reported a vast dispersion in hedge fund performance overall, as demonstrated by the 51.55% return spread between the top 10% and bottom 10% of performers.
Investor flows by strategy
Despite 2022’s vexing market conditions, investor flows into hedge funds administered by Citco held up relatively well, with a net outflow of only $11.5 billion. The year started out positive, with a robust first-quarter net inflow of $14 billion. However, gross redemptions more than offset gross subscriptions in the other three quarters, tipping investor flows into the red for the full year.
In 2021, Citco-administered hedge funds recorded robust net inflows of $37.3 billion. However, 2022’s more challenging macroeconomic backdrop, marked by a major conflict in Europe, skyrocketing inflation, and steadily rising interest rates, weighted heavily on investor sentiment, triggering a dramatic shift in investor flows.
Even though investors abandoned ship on many strategies in 2022, some continued to enjoy net inflows for the year. For example, hybrid funds retained their position as the most-popular hedge fund strategy for another consecutive year, racking up impressive net inflows of $20.7 billion in 2022 after sizable subscriptions in the first and fourth quarters.
Despite their lackluster performance, multi-strategy funds managed a positive net inflow for 2022 on the back of a strong first-quarter net redemption of nearly $5 billion. Multi-strategy funds ended the year with net inflows of $2.8 billion.
Hedge funds utilizing equities-related strategies recorded $23.7 billion in net outflows, making them the least-favored strategy in 2022. In second place were funds of funds with net outflows of $5.8 billion.
Investor flows by size
Despite their dismal performance relative to that of their smaller peers, the largest funds with over $10 billion in assets recorded the smallest outflows in 2022, with net redemptions of $1.2 billion for the whole year. On the other hand, the smallest funds with less than $1 billion in assets recorded the largest net outflows for 2022, at $4.1 billion.
Geographically, Europe was the only region to record net inflows for all of 2022, at $4.5 billion. Americas- and Asia-based funds recorded net outflows of $10.2 billion and $5.8 billion, respectively.
Looking more broadly, HFRI reported that fourth-quarter and full-year outflows were spread across all size groups. While Citco’s data indicated that larger funds saw the smallest outflows, HFRI found the opposite result and reported much larger net outflows when surveying globally.
Funds with more than $5 billion in assets under management saw a net outflow of $10.2 billion for the fourth quarter, bringing their full-year net outflow to $31.9 billion for 2022. Funds with $1 billion to $5 billion saw fourth-quarter net outflows of $8.3 billion, capping their full-year net outflows at $18.5 billion.
The report notes that funds with less than $1 billion in assets recorded almost $3.1 billion in net outflows for the fourth quarter and full-year net outflows of $5 billion for 2022.
Finance
Bonds See 2023 Recession, Stocks Aren’t So Sure


Fixed income markets are increasingly pricing in a recession, but the stock market remains … [+]
AFP via Getty Images
The yield curve is one of the most robust recession predictors and has signaled a recession may be coming since mid 2022. In contrast, U.S. stocks as measured by the S&P 500 are up materially from the lows of last October and only just below year-to-date highs, seemingly rejecting recession fears. Yet, fixed income markets see the Fed potentially cutting rates by the summer, perhaps reacting to a U.S. recession.
The Evidence From The Bond Markets
The recessionary evidence, at least from fixed income markets, is mounting. The 10 yield Treasury yield has been below the 2 year yield consistently since last July. That is is called an inverted yield curve and has signaled a recession fairly reliably when compared to other leading indicators.
Building on that, fixed income markets see almost a nine in ten chance that the Federal Reserve cuts rates by September of this year. That’s something the Fed has repeatedly said they won’t do on their current forecasts. Yet, a recession could cause it to happen.
The Stock Market
In contrast, the stock market shows some optimism. The S&P 500 is up 7% year-to-date as the market has shrugged off fears of contagion from recent banking issues. In particular, tech stocks have rallied.
In contrast, more defensive sectors such as healthcare, utilities and consumer goods have lagged in 2023. This suggests that the stock market is taking more of a ‘risk on’ position and is perhaps less worried about the economy.
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That said the stock market is a leading indicator of the business cycle, it may be that stocks see a recession, but are now looking past it to growth ahead and are factoring in the lower discount rates that a recession might bring as interest rates decline. Also, the U.S. stock market is relatively global, so the fate of the U.S. economy is a key factor in driving profits, but not the only one.
What’s Next?
Monitoring unemployment data will be key. Though the yield curve is a good long-term forecaster of recessions it is less precise in signaling when a recession starts. Unemployment rates can offer more accurate recession timing. Unemployment edged up in February, suggesting a recession may be near, but we’ve also seen monthly noise unemployment. Two similar monthly unemployment spikes during 2022 both proved false alarms.
However, if we see a sustained move up in unemployment from the low levels of 2022 that may be a relatively clear sign that a recession is here. Economist Claudia Sahm estimates that a sustained 0.5% increase in unemployment rate from 12-month lows is sufficient to trigger a recession. Unemployment rose 0.2% from January to February 2023, so maybe we’re on the way there. Of course, the jobs market performed better than expected in 2022 and it could do so again. Still, fixed income markets do suggest a 2023 recession is coming. Stock markets don’t necessarily share that view.
Finance
Which States Have The Highest And Lowest Life Expectancies?


Where you live can influence how long you live
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There’s a wide variance of life expectancies among the 50 states in the U.S., according to a recent report prepared by Assurance, an insurance technology platform that helps consumers with decisions related to insurance and financial well-being.
Figure 1 below shows the 10 states with the highest life expectancy, starting with Hawaii, the state with the highest life expectancy.
Steve Vernon using data from Assurance
Figure 2 below shows the 10 states with the lowest life expectancy, starting with Mississippi, the state with the lowest life expectancy.
Steve Vernon using data from Assurance
Assurance scoured life expectancy data prepared in January 2023 by the U.S. Centers for Disease Control and Prevention (CDC). With this data, Assurance created several easy-to-understand graphics that offer information about life expectancies.
Life expectancies are a basic measure of well-being
As measured by the CDC, life expectancies are a basic measurement of well-being in a broad population and not a prediction of how long an individual might live. The CDC measures the expected lifespan for a person born in the year of measurement. This measurement is calculated based on the assumption that the individual will live and die according to the rates of death that are prevalent in the measurement year for each age. There’s no assumed improvement or backsliding in the assumed mortality rates in future years for each age in the life expectancy calculation.
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By contrast, an estimated lifespan for an individual would consider their current age, their gender, and some basic lifestyle information. It might also attempt to project future improvements or backsliding in mortality rates based on key factors.
Significant influences on life expectancy calculations
Leading causes of death in the U.S. are heart disease, cancer, and accidents in that order. These immediate causes are significantly influenced by factors in the population such as poverty rates, educational attainment, rates of obesity and smoking, access to healthcare, prevalence of violent crime, and the support people receive from federal, state, and local governments. All these factors can vary widely among different states, which can be a key reason why life expectancies vary by state.
When you think about it, all these factors also have the potential to influence a person’s quality of life. The measured life expectancy rate rolls up all these factors into one objective measurement of well-being that’s based on population data.
In addition to the factors listed above, mortality rates increased and life expectancies decreased in the past few years due to the Covid-19 pandemic. A recent article titled “Live Free And Die” summarized recent research results that show that life expectancies in most countries around the world rebounded after the Covid-19 pandemic but that they continued to decline in the United States. Many of the reasons cited in the article for the continued decline in U.S. life expectancies are the same or similar to the factors listed above.
Why should retirees care about the life expectancies reported here if these measures don’t predict your own lifespan? Life expectancy calculations indicate the general well-being of the entire population in your area. While the living conditions in your area can influence your own lifespan and quality of life, retirees should focus on their remaining life expectancy given their age. They should also consider how the factors listed above that influence life expectancies in the population might apply to them.
You can obtain customized estimates of your remaining life expectancy at the Actuaries Longevity Illustrator. Part of your planning for retirement is understanding how long you an an individual might live, instead of relying on generalized information about larger populations you see in the media.
Finance
IRS Dirty Dozen Campaign Warns Taxpayers To Avoid Offer In Compromise ‘Mills’


Business people stress the cost
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Owing taxes can be stressful. Unfortunately, the actions of some companies can make it worse. As part of its “Dirty Dozen” campaign, the IRS has renewed a warning about so-called Offer in Compromise “mills” that often mislead taxpayers into believing they can settle a tax debt for pennies on the dollar—while the companies collective excessive fees.
Dirty Dozen
The “Dirty Dozen” is an annual list of common scams taxpayers may encounter. Many of these schemes peak during tax filing season as people prepare their returns or hire someone to help with their taxes. The schemes put taxpayers and tax professionals at risk of losing money, personal information, data, and more.
(You can read about other schemes on the list this year—including aggressive ERC grabs here, phishing/smishing scams here and charitable ploys here.)
Tax Debt Resolution Schemes
“Too often, we see some unscrupulous promoters mislead taxpayers into thinking they can magically get rid of a tax debt,” said IRS Commissioner Danny Werfel.
“This is a legitimate IRS program, but there are specific requirements for people to qualify. People desperate for help can make a costly mistake if they clearly don’t qualify for the program. Before using an aggressive promoter, we encourage people to review readily available IRS resources to help resolve a tax debt on their own without facing hefty fees.”
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Offers In Compromise
Legitimate is a key word. Offers in Compromise are an important program to help people who can’t pay to settle their federal tax debts. But, as the IRS notes, these “mills” can aggressively promote Offers in Compromise—OIC—in misleading ways to people who don’t meet the qualifications, frequently costing taxpayers thousands of dollars.
An OIC allows you to resolve your tax obligations for less than the total amount you owe. You generally submit an OIC because you don’t believe you owe the tax, you can’t pay the tax, or exceptional circumstances exist.
Because of the nature of the OIC—and the dollars involved—the process can be time-consuming. It can also be confusing for taxpayers who may not have a complete grasp on their finances.
First, you must complete a detailed application, Form 656, Offer in Compromise. You must also submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses, with supporting documentation (generally, bank and brokerage statements and proof of expenses).
You’ll also need to submit a non-refundable fee of $205 and payment made in good faith. The payment is typically 20% of the offer amount for a lump sum cash offer or the first month’s payment for those made over time. Generally, initial payments will not be returned but will be applied to your tax debt if your offer is not accepted. Payments and fees may be waived if the OIC is submitted based solely on the premise that you do not owe the tax or if your total monthly income falls at or below income levels based on the Department of Health and Human Services (DHSS) poverty guidelines.
The IRS will examine your application and decide whether to accept it based on many things, including the total amount due and the time remaining to collect under the statute of limitations. The IRS will also review your income—including future earnings and accounts receivables—and your reasonable expenses, as determined by their formula. The IRS will also consider the amount of equity you have in assets that you own—this would include real property, personal property (like automobiles), and bank accounts.
Criteria
Before your offer can be considered, you must be compliant. That means you must have filed all your tax returns and paid off any liabilities not subject to the OIC. After you submit your offer, you must continue to timely file your tax returns, and pay all required tax, including estimated tax payments. If you don’t, the IRS will return your offer.
Additionally, you cannot currently be in an open bankruptcy proceeding, and you must resolve any open audit or outstanding innocent spouse claim issues before you submit an offer.
Representation
You can probably tell—it’s a lot to consider. You may want representation. A tax professional can help marshal you through the process and offer practical guidance, while communicating what fees could look like.
By contrast, according to the IRS, an OIC “mill” will usually make outlandish claims, frequently in radio and TV ads, about how they can settle a person’s tax debt for cheap. Also telling: the fees tend to be significant in exchange for very little work.
Those mills also knowingly advise indebted taxpayers to file an OIC application even though the promoters know the person will not qualify, costing taxpayers money and time. You can check your eligibility for free using the IRS’s Offer in Compromise Pre-Qualifier tool.
“Pennies On A Dollar”
What about those promises that taxpayers can routinely settle for pennies on a dollar? Not true. Generally, the IRS will not accept an offer if they believe you can pay your tax debt in full through an installment agreement or equity in assets, including your home. That’s why the IRS tends to reject a majority of OICs that are submitted. The acceptance rate is less than 1 in 3, according to the 2021 Data Book.
The IRS will generally approve an OIC when the amount offered represents the best opportunity for the IRS to collect the debt. It’s true that there’s a formula that the IRS uses to figure out how much they think they can collect from you. But there is some wiggle room to account for special circumstances, including a loss of income or a medical condition. It’s worth noting those are the exceptions, not the rule.
Collections
While submitting an OIC may keep the IRS from calling you, it doesn’t stop all collections activities—don’t believe companies that suggest that submitting an OIC will make your tax debt disappear. Penalties and interest will continue to accrue on your outstanding tax liability. Additionally, the IRS may keep your tax refund, including interest, through the date the IRS accepts your OIC.
You may also be liened. In most cases, the IRS will file a Notice of Federal Tax Lien to protect their interests, and the lien will generally stay in place until your tax obligation is satisfied.
Be Skeptical
An OIC is a serious effort to resolve tax debt and shouldn’t be taken lightly. Be skeptical—if it sounds too good to be true, it likely is. If you’re considering an OIC, hire a competent tax professional who understands the rules and is willing to level with you about your chances of being successful—including other options. Don’t fall into a trap that can make your situation worse.
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