Some Big Hedge Funds Surge with Market Upheavals

Date: Thursday, December 6, 2007
Author: Dane Hamilton, Reuters

NEW YORK (Reuters)—Many hedge funds have had a rough ride this year, particularly in August and November, but a number have benefited from the market volatility to produce substantial gains, fund managers and others said.

Some large firms, such as Everest Capital, MKP Capital Management, Harbinger Capital and Horseman Capital, posted gains of at least 30% and sometimes much more in some of their funds this year, highlighting the reason investors keep pouring money into the $1.9 trillion industry.

Many firms bet big in well-trod hedge fund strategies, such as going long on emerging markets or shorting financial stocks. Others won big in credit strategies, mainly on the short side. But designing a winning strategy is no slam dunk even by following directional trends, suggesting some hedge funds may be worth the ultra-high fees they charge.

London-based Horseman Capital, a $3.6 billion firm with three funds, is up about 30% in the year through November in its $2.6 billion global macro fund, said Alain Zakeossian, client relations manager. "Sector selection is key," he said, noting the fund has been net long since 2003 in sectors including energy and oil exploration, shipping and transportation, mining and others. The fund, founded by John Horseman in 2001, has posted average annual returns of 22.5%, excluding fees.

The Horseman emerging markets fund, while smaller at $150 million, is up 100% since its inception 13 months ago, said Mr. Zakeossian, attributing the gains to "superior country selection," such as China, where many hedge funds won big. Similarly, Everest Capital, a $3 billion Bermuda-based firm, is up more than 30% in both its $1 billion emerging markets fund and its global macro fund this year, according to Everest director Ross Ellis. Its China Opportunity fund is up more than 60%, he said.

"We stayed away from CDOs and SIVs," said Mr. Ellis, referring to credit vehicles that caused pain for many investors this year. "But we've been able to short some U.S. banks and take advantage of the growth in the middle classes in emerging markets." He said the firm, founded by trader Marko Dimitrijevic, posted average returns of 17% since inception in 1990 for its macro fund, a strategy that makes bets on trends such as the dollar declining and volatile commodity prices.

MKP Capital, a $5 billion hedge fund group, has also cleaned up in global macro and credit strategies this year. MKP Opportunity LP and its sister offshore "macro" fund, which together manage about $300 million, are up 47% in the year through November with such strategies as shorting European financial stocks and others, a person familiar with the results said.

MKP, which specializes in credit-related strategies, has also done well this year in trading distressed debt and shorting securities or indexes related to the subprime lending market meltdown. MKP's Credit and Credit Offshore funds, which together manage $523 million, are up 25% through last month, while its Credit II funds are up 14%, the source said. MKP declined to comment.

Another fund manager, the $4 billion Zweig-DiMenna Partners, is also posting mega returns this year in some flagship equity funds. Zweig-DiMenna International Ltd., for instance, is up 74% through November, according to a source. Further details on its strategy could not be obtained and the firm declined to comment.

By Dane Hamilton

Dane.Hamilton@Reuters.com