Hedge fund winners in a year of turmoil

Date: Monday, November 10, 2008
Author: David Walker and Stephanie Baum, Wealth-Bulletin.com

The largest funds have proved to be the safest

Big may not always be better, but for investors in 18 of the world’s largest hedge fund managers whose flagship funds have made money this year, it has proved safer. True, some of the gains by the largest managers have been meagre – Cerberus International and Millennium International Fund made just 0.1% to September 30 – and those losing money far outnumber those making it.

However, an investor document seen by Financial News shows some groups, such as BlueCrest Capital Management and Paulson, made at least 15% on their flagships to September 30.

Nicola Ralston, co-founder of investment consultants PiRho Investment Consulting, said asset size was no fail-safe protection against investment losses: “Just because you’re with a big name doesn’t mean you’re any more protected in terms of returns,” she said. However, the star funds at BlueCrest, Paulson, York Capital Management and Brevan Howard Asset Management all made double-digit returns.

The fact that only 18 of 79 large managers that reported September results are in the black this year compares badly with the 67 of the top 100 that reported their flagship portfolios were up at the end of last year. But by comparison, the MSCI index of global shares rose 7.1% last year, compared with its 36.6% fall this year to September 30.

The fate of funds run by the largest 100 managers matters, because about 81% of the industry’s $1.72 trillion is entrusted to them. One investor in large hedge funds said: “They may not be as nimble, and they may not always produce the returns of smaller hedge funds, but large funds are large for a reason, their managers are generally more experienced and if they face redemptions, it’s not likely to pull the whole business down.”

John Godden, founder of consultancy IGS Group, said partners at larger firms could reinject capital in to the business whereas smaller firms’ managers might be less able to do so.

However, Gary Vaughan-Smith, co-founder of $600m fund of hedge funds Silver Street Capital, said Silver Street avoided very large funds. He said: “After the sub-prime crisis we could see liquidity being an issue so we have been biased towards smaller funds. In the third quarter we have seen some big names down 20% or 30%. In the past you would have been scrambling for capacity but now we want to be in funds between $200m and $1bn.” Silver Street’s product is down about 3% since launching in June.

Smith said: “The big funds tend to have some private equity and illiquid credit instruments and convertible bonds. If they see redemptions there would be large amounts of money to be raised.” The following funds are ranked by year to date perfomance

1. BlueCrest Capital Management Launched: 2000 Assets*: $12bn (€9.4bn) Flagship fund AllBlue: YTD 18.9% Key personnel: Michael Platt (head of trading), Jonathan Martin (head of risk) HQ: London

The 18.9% return from BlueCrest’s flagship computer-driven fund this year is the best by a flagship of any of the world’s largest 100 managers. Its success identifying and profiting from trends in various markets follows the 27.8% it made last year, 11.3% in 2006 and 19.4% in 2005, according to investors. Performance fees it generated helped BlueCrest post turnover of £290m for the 12 months to November 30 last year. AllBlue’s return this year to September 30 beats the 7.8% average from other computer-driven funds, measured by analyst BarclayHedge. BlueCrest did not comment.

2. Paulson & Co Launched: 1994 Assets: $29bn Flagship fund Paulson Advantage: YTD 15% Key personnel: John Paulson (founder) HQ: New York

John Paulson reportedly pocketed $3.7bn last year from putting a lot of money on falling values of instruments linked to sub-prime mortgages. This year he has continued staking money on it, including some from Paulson Advantage. Paulson said he would launch the Recovery fund last month to buy shares and convertible bonds in distressed companies, including banks. Paulson Advantage Plus fund grew from about $100m in January last year to about $9bn by last month. Also making headlines was the 589.6% gain last year from one of Paulson’s credit long/short funds. To August 31 this year it made 12.5%. Paulson’s shorting four UK banks has made him hundreds of millions of pounds since September 19. Paulson declined to comment.

3. York Capital Management Launched: 1991 Assets: $13bn Flagship fund York Investment: YTD 14.7% Key personnel: James Dinan (chief executive), Daniel Schwartz (chief investment officer) HQ: New York

Investors in the flagship fund of York Capital Management, which stakes money on market events, made 5.2% in 2005, then 13.0% the following year, and 19.8% last year. York was founded in 1991 by James Dinan, who describes York’s area of expertise – investing in companies involved in market events such as mergers – as “an information game”. This year and next, event-driven funds could find more opportunities to invest in distressed securities. The firm has funds focusing on Asia, Europe, value investments and credit. York did not return calls inviting comment.

4. Brevan Howard Launched: 2003 Assets: $26bn Flagship fund Brevan Howard: YTD 14.1% Key personnel: Alan Howard (lead partner) HQ: London

Brevan Howard’s flagship fund has made money from market uncertainty and volatility in instruments linked to macroeconomic variables. Ian Plenderleith, chairman of BH Macro, the listed portfolio feeding into the flagship fund, said profits came from basic research on economies to uncover market dislocations. The fund made 25.2% last year and 11.1% in 2006. Brevan Howard’s assets grew 73% in the 12 months to June 30. Global macro funds produced, on average, 3.3% to September 30, according to Hedge Fund Research. It is believed the Brevan Howard fund was up 16.3% by October 24. Brevan Howard did not comment.

5. DE Shaw Group Launched: 1988 Assets: $36bn Flagship fund Oculus International fund: YTD 9.72% Key personnel: David Shaw (founder), Christopher Zaback (chief financial officer) HQ: New York

Investors in the computer-driven Oculus fund have followed 2005’s 10.3% gain with 18.0% in 2006 and 26.7% last year. Oculus makes money by investing in financial instruments linked to macroeconomic variables. DE Shaw has been investing on the basis of quantitative analysis for 20 years. This year it was unwittingly caught up in the insolvency of Lehman Brothers by way of the collapsed US bank having bought a 20% stake in the fund manager last year. The firm hired Richard McKinney from Lehman in September to manage its new asset-backed securities unit. In August it hired Tom Levy from Morgan Stanley to deal with counterparties, reflecting the growing institutionalisation of hedge funds.

6. Man Investment Launched: 1783 Assets: $24bn Flagship fund Man AHL Diversified: YTD 7.7% (October 28) Key personnel: Peter Clarke (chief executive), Tim Wong (head of AHL), Kevin Hayes (finance director) HQ: London

On October 31, computer-driven fund AHL was only 2% away from its previous high, and Man Group’s chief executive Peter Clarke said last week “any material upward move in AHL” would generate performance fees. Over the past five years, AHL has made 15.5% annualised, and 20.7% over three, according to Man. In 1993, AHL’s founders calculated it could not handle more than $1bn without becoming too large for the markets it traded. Fifteen years later it has grown to $24.7bn and invests in more than 150 markets.

7. Winton Capital Management Launched: 1997 Assets: $16bn Flagship fund Winton Futures; YTD 8.8% Key personnel: David Harding (founder) HQ: London

If David Harding regrets selling AHL to Man Group in 1994, he needn’t. Winton, which he founded three years later, manages about $16bn in two computer-driven funds, Winton Futures and Evolution. Last year the Futures fund made 18%, following 17.8% in 2006. More than half Winton’s staff are involved in analysing the 120 financial markets their funds invest in and about 60 of its 104 researchers hold doctorates in various disciplines. Winton declined to comment.

8. Eton Park Capital Management Launched: 2004 Assets: $11bn Flagship fund Eton Park Overseas fund: YTD 7.9% Key personnel: Eric Mindich (founder) HQ: New York

Eric Mindich, former trader at Goldman Sachs, has expanded Eton Park’s remit since founding it in 2004. Mindich made 40.9% last year and 11.7% in 2006. He has diversified his $11bn firm into private equity and distressed debt and also moved into the pension buyout business indirectly in 2006 by providing capital to UK buyout firm Paternoster. Mindich is also chair of the asset managers committee of the US President’s Working Group on Financial Markets. Given many US voters’ anger at hedge funds, investors may scrutinise Mindich’s performance at the standard-setting body as keenly as in financial markets. Eton Park did not return calls.

9. Elliott Management Corp Launched: 1977 Assets: $15bn Flagship fund Elliott International: YTD 6.6% Key personnel: Paul Singer (founder) HQ: New York

Elliott’s flagship fund has the flexibility to invest across various financial markets. Its flagship fund’s 6.6% return this year to September 30 compares well with its peers, however the fund had fallen slightly by October 31. Elliott has two main funds – Elliott International and Elliott Associates. The former is up 6.6% this year, after 32.1% last year and 12.7% in 2006, according to investors. Elliott made money last year by investing in distressed assets and restructuring companies. Elliott declined to comment.

10. FX Concepts Launched: 1981 Assets: $13bn Flagship fund Concepts Multi Strategy: YTD 11.0% Key personnel: John Taylor (founder) HQ: New York

FX Concepts has been investing in foreign exchange markets since 1988, and now runs $13.5bn. In 2006 the company, founded by John Taylor in 1981, moved its main European office from Paris to London, under managing director Daniel Szor. That year its multi-strategy currency fund made 9.5%, followed by 7.5% last year. The fund is up about 11% this year to November. Philip Simotas, senior manager at the firm, said the funds took views on the direction of FX markets and, along with computer-driven and global macro hedge funds, invested in very liquid markets. “We can move portfolios relatively easily compared to other strategies.”

* All assets under management figures are at September 30 unless otherwise stated.