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Hedge fund returns in 2007 disparate; Annual avg. gain 10.4%, but most big firms came up short

Date: Thursday, January 10, 2008
Author: Chicago Tribune

The average hedge fund gained 10.4 percent last year, including 0.7 percent in December, according to data released Tuesday by Chicago-based Hedge Fund Research Inc.

Seven of the 10 largest firms fell short of the annual average, said people with knowledge of their returns. Six were quantitative managers, who use mathematical models for some or all of their trades.

\\"Quantitative funds are in the penalty box,\\" said Stewart Massey, founding partner of Massey, Quick & Co., a Morristown, N.J.-based investment consultant. Larger funds struggled because \\"size is the enemy of performance,\\" he said.

Big quantitative, or \\"quant,\\" funds stumbled in August, when credit markets seized up as mortgage defaults increased. The highest returns were reported by managers who, unlike quants, use fundamental research to make investment decisions.

Ken Griffin\\\'s Citadel Investment Group LLC returned about 30 percent, driving assets at the Chicago-based firm to $20 billion from $13.4 billion in 2006. Magnetar Capital Fund, run by Evanston-based Magnetar Capital LLC, returned 25.3 percent.

Winners included Harbinger Capital Partners, which focuses on distressed securities and companies going through changes such as mergers and spinoffs. Those companies include Chicago-based metals distributor Ryerson Inc.; Lake Forest-based Salton Inc., maker of the George Foreman grill; and Bally Total Fitness Holding Corp.

Harbinger sought to win control of Ryerson, but the New York-based hedge fund sold its 9.6 percent stake after Ryerson shareholders in August rejected its seven nominees to the board and agreed to be taken private by buyout firm Platinum Equity.

Salton entered into a definitive merger agreement with APN Holding Co., which is owned by Harbinger. As a result of the proposed merger, the hedge fund will own 92 percent of the outstanding common stock of Salton. Bally emerged from a prepackaged bankruptcy thanks to an investment from shareholders led by Harbinger.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested. The people who provided returns asked not to be identified because performance numbers are private. Officials for the firms declined to comment.

The industry reported the most disparate returns in years, said Massey.

\\"I think that\\\'s a good thing for the industry,\\" he said. \\"People have realized that hedge funds aren\\\'t homogenous, and that you need to drill down when doing due diligence to understand the strategy and the amount of leverage used.\\"

This year might prove more difficult for managers to make outsize returns because of uncertainty over the U.S. economy and actions the Federal Reserve might take to prevent a recession, said Virginia Parker, president of Parker Global Strategies LLC in Stamford, Conn., which farms out money to hedge funds.

\\"The first two quarters will be tough,\\" she said. \\"Once that plays out, the second half of the year will be ripe with opportunities.\\"