Simons, Mandel Post Biggest Drop in Hedge Fund Slump

Date: Tuesday, April 8, 2008
Author: Katherine Burton, Bloomberg

Hedge-fund titans James Simons and Stephen Mandel are showing the biggest losses of their careers in the $1.9 trillion industry's worst start in more than a decade.

Simons's $18 billion Renaissance Institutional Equities Fund declined 12 percent since its value peaked last May, investors with direct knowledge of the situation said. Mandel's Lone Cedar Fund dropped about 10.6 percent from its high in December, according to people familiar with the fund.

Hedge funds lost an average 2.78 percent of their value in the first quarter, according to data compiled by Chicago-based Hedge Fund Research Inc. The debacle shows the extent to which frigid credit markets, depreciating homes and an economy exhibiting all the signs of a recession are wreaking havoc on even the savviest investors.

``This dislocation is so broad based that it's touching a lot of corners of the market that you wouldn't think would have been affected to this extent,'' said Larry Chiarello, director of research at Red Bank, New Jersey-based Riverview Alternative Investment Advisors LLC, which invests in hedge funds.

Losses haven't been confined to one or two investment strategies. Mandel and Simons approach investing from opposite directions.

Mandel, 52, picks stocks based on company fundamentals, a skill he learned at Julian Robertson's Tiger Management LLC. He left Tiger in 1997 to start Greenwich, Connecticut-based Lone Pine Capital LLC the following year. Simons's Renaissance Technologies Corp., based in East Setauket, New York, has spent more than 15 years developing computer models that pour through billions of pieces of data to select securities to buy and sell.

Declines From Peak

At the end of March, the largest funds run by Mandel and Simons had posted their biggest peak-to-trough declines, known as a maximum drawdown. They can still boast of having among the best long-term track records in the industry.

Mandel has averaged an annual return of about 26 percent since he started, compared with the 4.7 percent advance of the Standard & Poor's 500 Index. His Lone Cypress group of funds now has about $7.9 billion of assets. His current drawdown is roughly equal to his losses from August 1998 to November 1998, although he was managing less money then.

Simons, 69, was chairman of the math department at Stony Brook University in Stony Brook, New York, before starting Renaissance in 1982. He has produced average annual returns of almost 40 percent since 1989 for investors in his Medallion Fund, which trades stocks, bonds, currencies and commodities and now only manages money for Simons and Renaissance employees.

Worst Since 1930s

In August 2005, the company opened the stocks-only Renaissance Institutional Equities Fund. Simons promised lower, yet steadier, returns and said the fund had the capacity to manage $100 billion of assets. RIEF has dropped 6.64 percent this year, about the same as the S&P 500, and assets have declined from $21 billion because of the losses and client withdrawals.

World financial markets haven't been in such bad shape since the 1930s, billionaire hedge-fund investor George Soros said in an interview last week in which he predicted more losses.

``It's more serious than the authorities let on,'' said the 77-year-old Soros. While his $17 billion Quantum Endowment Fund hasn't hit its maximum drawdown, returns have ranged from plus 3 percent to negative 3 percent this year. The fund rose 32 percent in 2007.

Satellite, Barton Biggs

Other managers facing maximum drawdowns include Lief Rosenblatt and his partners Gabriel Nechamkin and Mark Sonnino, whose Satellite Overseas Fund fell 9.6 percent from the end of October through February. They started New York-based Satellite Asset Management LP, which invests in so-called distressed companies and those going through corporate events such as mergers, in 1999 after leaving Soros Fund Management LLC.

Traxis Partners LLC, the New York-based firm co-founded by former Morgan Stanley chief global strategist Barton Biggs, has declined 15 percent since the end of September. The $1.6 billion Traxis Fund chases macroeconomic trends by trading stocks, bonds, currencies and commodities. Biggs, who opened Traxis in 2003 with Morgan Stanley colleagues Madhav Dhar and Cyril Moulle-Berte, said last month that the Dow Jones Industrial Average may rally 1,000 points. He called the 11 percent decline from the Oct. 9 peak ``overdone.''

Executives at the hedge funds all declined to comment on performance.

Compared With 1998

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 industry has faced tough markets before.

There was a four-month period in 1998 after Russia defaulted on its debt and devalued its currency when the average fund fell 11.4 percent. That led to the Federal Reserve-orchestrated bailout of John Meriwether's Long-Term Capital Management LP, which lost about $4 billion in a matter of weeks. Funds rebounded, ending the year up an average 2.6 percent.

In 2002, at the tail end of the Internet crash and with the U.S. economy just emerging from a recession, funds declined 1.45 percent, their only losing year since Hedge Fund Research started collecting data in 1990.

Some managers who faced drawdowns in these markets have not only survived, but prospered. David Tepper, whose Appaloosa Management LP in Chatham, New Jersey, specializes in distressed debt, lost 49 percent in his Palomino Fund from February to September 1998. Nonetheless, the fund has posted an average annual return of about 25 percent since the beginning of 1995.

Market Volatility

Much of the problem this year has come from extreme price movements in different markets. The S&P 500 has moved by 1 percent or more on about half of all trading days this year, according to New York-based Standard & Poor's. The last time the percentage hovered at that level was in 1938.

Commodities prices have also gyrated. This year, crude oil has fallen below $90 a barrel twice and jumped to a high of $110 a barrel. It closed yesterday at almost $109 a barrel. The U.S. dollar has lost 4.13 percent this year against a trade-weighted basket of currencies tracked by the Federal Reserve.

The worst-performing funds in the quarter were multistrategy funds, which trade a variety of securities, and those that trade convertible bonds, according to Hedge Fund Research's HFRX index, which goes back to 1998. The best performers were macro funds, which try to profit on moves in interest rates, currencies, stocks and commodities.

Dry Powder

The current crisis has forced some funds to close down. London-based Peloton Partners LLP told investors in February that it would close its $1.8 billion ABS Fund after losing money on mortgage securities. The same month, Stamford, Connecticut-based Sailfish Capital Partners LLC decided to wind down its $980 million Multi-Strategy Fixed Income Fund.

A few managers have bucked the trend. John Horseman, who runs London-based $4.4 billion Horseman Capital Management LP, has returned 11.6 percent this year in his global stock fund.

AHL Diversified Plc, the futures trading system behind about $21 billion managed by London-based Man Group Plc, has gained 13 percent since the start of January, according to fund filings, its best start to a year in seven years.

Equity-fund managers, who account for about one-third of industry assets, held an estimated $90 billion of cash in January, a hoard that dropped to $64.8 billion in Februart, according to data compiled by Merrill Lynch & Co. analyst Mary Ann Bartels. The last time equity funds held cash outside of their trading accounts was in 2004, New York-based Merrill reported. At that time, market direction was also unclear, with the S&P 500 up less than 2 percent through October.

``Your average manager isn't invested and is sitting on lots of dry powder,'' said Brett Barth, a partner at New York-based BBR Partners, which invests money in hedge funds for clients.

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net