Hedge fund Artradis pummeled by bad volatility bets

Date: Friday, December 11, 2009
Author: Kevin Lim, Reuters

* Artradis' AB2 fund drops 23%, Barracuda fund down 11%

* Assets under management down by half to about $2 billion

* Funds were up sharply last year and in 2007

Hedge funds may be on track to post their best returns in a decade this year, but Singapore-based Artradis Fund Management won't be joining the party.

Redemptions and a dismal showing by its flagship volatility funds, which were star performers during the worst phase of the financial crisis, have wiped out about $2 billion, or half, of Artradis' total assets and cast doubt on the prospects of one of Asia's largest hedge funds groups.

The main culprits are its flagship Artradis AB2 Fund and the Barracuda fund, down 23 percent and 11 percent, respectively, in 2009 until early December, according to industry data.

"It will be tough for Artradis," said a rival fund manager in Singapore, who declined to be named because of the sensitivity of the matter.

"The watermark is an issue. If you drop 20 percent, it's going to be hard to climb back again and make money, and staff may leave since they are not going to get a bonus this year or next," the manager said.

Fund managers at Artradis were not available for comment.

The Asia-focused absolute return fund firm was founded in 2001 by Richard Magides and Steve Diggle, who were colleagues at Barings Bank in Singapore.

Both the AB2 and Barracuda funds have a pan-Asia focus and follow a market-neutral, long-volatility strategy -- betting on price swings -- which worked in their favour in 2008 as the crisis roiled global equity markets.

Volatility, which is the rate of change in the price of an asset, has an inverse relationship with price. Volatility in Asian markets soared in the 2008 fourth quarter but has fallen sharply this year with the markets heading uphill since March. Asian equities .TRXFLDAPPU are up 61 percent since then.

AB2's assets under management had dropped to $883 million by end-October from $2.4 billion at the beginning of the year, according to Lipper data. More recent industry data puts the fund's assets at a little over $1.2 billion.

Barracuda's assets were down to about $790 million by end-October from about $1.6 billion at the start of the year, Lipper data showed. Lipper is a unit of Thomson Reuters.

Total assets overseen by the hedge fund manager are down to over $2 billion now, as per Artradis' website, from more than $4 billion in 2008.

IMPRESSIVE PAST

The AB2 fund gained 35 percent in 2008, while the less-leveraged Barracuda fund returned 27 percent. That compared with a 13 percent drop for the average global multi-strategy hedge fund, according to Lipper, and a 21 percent fall for the the average Asia-focused hedge fund, according to Eurekahedge.

And in 2007, the funds were even more impressive, with the AB2 up 57 percent and the Barracuda gaining 35 percent.

While Artradis' fortunes have slumped, some similar-strategy funds have managed to hold still or even eke out positive returns this year.

Titan Capital Group's $130 million Titan Asia Volatility Fund, which uses volatility arbitrage strategies, is down less than 2 percent this year, while Pengana Global Volatility Fund had risen close to 12 percent by end-November.

The industry overall is also having a memorable year.

Hedge fund assets have crossed the $2 trillion level after a year and, according to industry research firm Hedge Fund Research, the funds have returned 18.8 percent since January and are set for their best annual returns in 10 years.

Some said the outlook for volatility based funds will be brighter in 2010.

"A lot of people believe the markets will have a rocky ride in 2010," said a manager at a London-based fund-of-hedge-funds.

"That should put volatility funds back in favour with investors."