Hedge Funds Fell 0.75%, Worst First-Half Performance

Date: Wednesday, July 9, 2008
Author: Katherine Burton and Saijel Kishan, Bloomberg

Hedge funds turned in their worst first-half performance in almost two decades because of the credit crunch and the onset of a bear market in stocks.

Hedge funds declined by an average 0.7 percent in June, bringing the year-to-date loss to 0.75 percent, data compiled by Hedge Fund Research Inc. show. It's the worst start to a year since the Chicago-based firm began tracking returns in 1990. The $1.9 trillion industry has posted one losing year, in 2002, when funds fell 1.45 percent.

``Equity markets have made for an incredibly difficult environment,'' said Mark Dampier, an analyst at Hargreaves Lansdown Stockbrokers in Bristol, England, who tracks the money- management industry.

Managers attracted a net $16.5 billion during the first three months of the year, down from $30.4 billion in the fourth quarter, Hedge Fund Research reported. Investors have become less tolerant of losses and are shifting assets to traders who have shown they can thrive in turbulent markets, said Antonio Munoz, who runs EIM Management USA in New York, which farms out $15 billion to hedge funds.

``We don't see investors pulling the plug across the board and putting their capital into cash,'' Munoz said.

Joseph Oughourlian's Amber Capital Management LP and Polygon Investment Partners LLP are among the firms hurt by redemptions. Amber Capital had $2.5 billion of withdrawals as of July 1 after the New York-based firm dropped 9.5 percent in the first half, according to investors. Oughourlian, who focuses on companies going through corporate changes such as mergers, oversaw $6.6 billion at the start of the year. The fund returned 38 percent in 2006 and 13 percent in 2007.

Fund Outflows

London-based Polygon, co-founded by former UBS AG hedge-fund chief Paddy Dear, had redemptions of about $1.5 billion this year through May as its Global Opportunities fund lost 4 percent.

``Investors are showing less patience than before to live through the bad times,'' said Patrik Safvenblad, head of hedge- fund research in Stockholm for DnB NOR ASA, Norway's biggest bank.

Assets in Renaissance Technologies Corp.'s institutional equities fund, run by James Simons, declined 25 percent to $15 billion this year as the fund dropped 8.5 percent and clients withdrew cash, investors said. Almost all the money went into the East Setauket, New York-based firm's institutional futures fund, which has climbed 8.6 percent this year and now has $7 billion.

Executives at the hedge-fund firms all declined to comment.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

Bear Market

Stock markets in the U.S., Europe and Asia have been falling since October amid mounting losses from subprime mortgages, rising oil prices and the weaker U.S. dollar against most major currencies.

The Standard & Poor's 500 Index has dropped 19 percent from its peak on Oct. 9, the U.K.'s FTSE 100 Index fell 18 percent and Japan's Nikkei 225 Index tumbled 24 percent. A decline of more than 20 percent in 12 months is considered a bear market.

Stock hedge funds fell by an average 3.3 percent this year, according to Hedge Fund Research. Funds that invest in convertible bonds dropped 7.6 percent on average.

``After saying for years they needed more volatility, many managers suddenly couldn't cope with it,'' said Bob Michaelson, group investment director for Fleming Family & Partners Asset Management Ltd. in London, which invests about 25 percent of its 4 billion pounds ($7.8 billion) in hedge funds.

Veterans to Rookies

John Paulson and Philip Falcone have successfully navigated the markets and are attracting new investors. Paulson, who runs the $33 billion Paulson & Co. in New York, returned 26 percent in his Advantage Plus Fund through June, according to investors.

Falcone, who heads the $26 billion Harbinger Capital Partners in New York, has racked up a 42 percent return for his main Harbinger Capital Partners Fund, clients said.

Quantitative Investment Management LLC, a Charlottesville, Virginia-based firm that uses computer models to make investment decisions, has gained 6.7 percent this year in its main fund, which has grown to $3.6 billion after the returns and $700 million in inflows, investors said.

Some new funds run by managers who previously worked at larger hedge fund groups have gotten off to a fast start, according to a survey published by Absolute Return magazine.

The biggest stand-alone startup was Greenwich, Connecticut- based Conatus Capital Management LP, which raised $2.3 billion. The firm was started earlier this year by David Stemerman, formerly of Stephen Mandel's Lone Pine Capital LLC. Highliner Investment Group LP in Chicago raised $1.5 billion. Highliner was founded by Anand Parekh, who was previously global stock head for Ken Griffin's Citadel Investment Group LLC.

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net