Top Hedge Funds That Dodged Crash, Rode Market Back Turn Gloomy |
Date: Tuesday, August 3, 2010
Author: Saijel Kishan, Bloomberg
Shawn Bergerson, founder of Waterstone Capital Management LP, made money when most hedge funds didn’t: in 2007 and 2008, as the housing-market collapse turned into a global financial rout, and in the recovery that has followed.
Bergerson said he bet against convertible bonds of Advanced Micro Devices Inc. in June 2007. More than a year later, he reversed course and bought the securities. After riding the rebound by markets in 2009, he’s wagering against consumer- related stocks because he sees Americans curtailing spending and reducing debt amid high unemployment.
“While I’m not expecting a major economic crisis or a disaster, the consumer is in a weak position,” Bergerson, 45, said in a telephone interview from his office in Plymouth, Minnesota, where he oversees $1.17 billion.
He’s one of a small minority of hedge-fund managers, including Alan Howard and Colm O’Shea, who haven’t had a losing year since 2007 as they navigated the credit-market freeze, Lehman Brothers Holdings Inc.’s bankruptcy, the biggest stock- market rally in six years and the uncertainty over the direction of the global economy that has marked 2010. It’s a feat that eluded investors with top long-term returns, such as Steven A. Cohen, Louis Bacon and Ken Griffin, who each posted the worst losses of their careers in 2008, as well as almost 3,300 hedge funds that have shut since the start of 2007.
Economy Losing Momentum
In interviews and investor letters, managers who dodged the financial crisis said they expect the U.S. and European economies to slow. David Gerstenhaber of the Argonaut Macro Partnership fund and Xerion fund’s Daniel Arbess favor investments tied to emerging markets. O’Shea, who runs COMAC Capital LLP, and Laurence Benedict of Banyan Equity Management LLC said they have reduced the size of their investments because it’s hard to know how markets will behave.
Gerstenhaber is planning to bet against industries that do poorly when the economy loses steam, such as materials, energy and homebuilders.
“Our expectation is that we will continue to see downward revisions to growth forecasts in advanced economies,” Gerstenhaber, 49, said in a telephone interview. The $1 billion Argonaut Macro returned a cumulative 48 percent from the start of 2007 through June 2010.
Gerstenhaber, who founded New York-based Argonaut Capital Management in 1993, said he’s keeping his long position in China’s yuan, an investment he’s had for more than a year that will profit if the currency rises.
Emerging-Markets Faith
“A small number of emerging markets can decouple, particularly those that are able to generate strong domestic demand such as China, India, Brazil and Indonesia,” Gerstenhaber said.
While slowing U.S. and European economies may trim growth in emerging markets, New York-based Arbess said he’s investing in companies that benefit from demand in developing countries.
“I believe in the resiliency of the emerging markets,” he said in an interview. “They have the balance-sheet strength to continue funding their development, whereas we in the West are over-stretched.”
Arbess, 49, a partner at Perella Weinberg Partners LP, said he was betting against “over-leveraged entities” in European and Group of Seven nations, declining to identify the securities he was using to execute the trades. His $2.1 billion Xerion fund returned 95 percent from the start of 2007 through May 2010.
Opposing View
Scott Ramsey, founder of Denali Asset Management, which has $206 million in assets, doesn’t see emerging markets bailing out the U.S. or Europe.
“It’s hard for me to believe that the rest of the world has enough aggregate demand to offset the sluggish U.S. and euro zone,” said Ramsey, whose Denali Partners fund returned 45 percent in the 3 1/2 years through June 2010.
The $1.65 trillion hedge-fund industry, after posting its worst second-quarter performance in a decade, is taking less risk, using less debt and making fewer trades, according to data from securities exchanges and brokers including Credit Suisse Group AG and JPMorgan Chase & Co.
Hedge-fund clients of Zurich-based Credit Suisse held 24 percent of their assets in cash in June, compared with 19 percent three months earlier. Daily trading volume for the Standard & Poor’s 500 Index of the largest U.S. companies averaged 1.09 billion shares in June, 20 percent less than in May.
‘Schizophrenic’ Market
U.S. stock-market volatility as measured by the Chicago Board Options Exchange Volatility Index tripled in May from April as equities plunged on concern that European leaders couldn’t control the region’s debt crisis. The VIX measures prices paid for S&P 500 index options.
“The markets have been schizophrenic,” Ramsey said.
Ramsey, 52, said he expects stocks to decline this quarter as a U.S. unemployment rate of 9.5 percent and austerity measures in Europe curb consumer demand.
“Based on current policy, what have been fiscal tailwinds are now fiscal headwinds,” he said in a telephone interview from his office in Christiansted, Virgin Islands. “Private payrolls need to increase and we need to get a lot more of the 8 million lost jobs back.”
Ramsey, like many of the managers that fared well from 2007, runs a macro fund, which seeks to profit from broad economic trends by trading stocks, commodities and currencies. He holds his trades for an average of a week. The HFRI Macro Index climbed 20 percent from January 2007 through June 2010.
O’Shea Pessimistic
O’Shea, whose London-based hedge-fund firm oversees $5.9 billion, shares Ramsey’s pessimism.
The budget crisis faced by state and local governments in the U.S. is likely to hamper the nation’s growth, O’Shea said.
To balance budgets, state and local governments may have to fire workers, which will increase unemployment rates and have “significant knock-on effects to aggregate demand,” O’Shea, 40, said in an investor letter this month. O’Shea’s COMAC Global Macro fund has returned 73 percent since the start of 2007.
O’Shea also said that were “medium-term downside risks” to growth and inflation in Europe as monetary and fiscal policies were becoming “less supportive.” He didn’t list his trades in the letter.
Waterstone’s Bergerson, who started the Waterstone Market Neutral Master Fund in 2000, mainly invests in convertible bonds, securities that can be converted into shares at a preset price, as well as corporate bonds and equities. The fund returned 84 percent from the start of 2007 through June this year, according to an investor letter.
Industry Returns
It’s one of 321 hedge funds that were agile enough to make money for investors every year since the onset of the financial crisis in 2007, according to data compiled on 2,799 funds by PerTrac Financial Solutions, a New York-based investment- software company.
The hedge-fund industry on average returned a cumulative 6.6 percent in the 3 1/2 years through June, according to Chicago-based Hedge Fund Research Inc. The S&P 500 lost 22 percent in the period. U.S. Treasuries returned 27 percent, according to Bank of America Merrill Lynch index data.
Hedge funds gained an average 10 percent for investors in 2007, lost a record 19 percent in 2008 before rebounding 20 percent last year, according to Hedge Fund Research. The industry has lost 0.21 percent this year through June.
What Worked
The winning-streak managers made money through a combination of prescient investment calls, having smaller trades for shorter periods of time, which enabled them to get out of unprofitable positions sooner, and raising cash before markets slumped in the second half of 2008.
Perella’s Arbess started shorting, or betting against, collateralized-debt obligations tied to subprime mortgages at the end of 2006. Howard, 46, co-founder of London-based Brevan Howard Asset Management LLP, raised cash in February 2008 in anticipation that the housing collapse in Europe and the U.S. would cause credit markets to seize. Gerstenhaber bet in the middle of 2008 that European interest rates would fall and in September of that year shorted the euro.
Benedict, founder of $804 million Banyan Equity Management in Boca Raton, Florida, said he’s reduced the size of his trades to about a third of what they usually are, and to the lowest since October 2008, because of uncertainty over the economy.
“It’s difficult to get conviction in this environment,” said Benedict, 48, who holds trades for no longer than five days and whose Banyan Capital fund returned 56 percent since the start of 2007 through June this year.
“There will be more clarity by the third quarter following the release of economic indicators.”
Below is a list of some of the hedge funds that profited each year since 2007. Brevan Howard, COMAC, Denali, Galena, Brownstone, Argonaut, King Street and BlueCrest have made money in every year since they started.
Hedge Fund YTD* 2009 2008 2007 TOTAL
RETURN**
Rubicon Global 15.2 14.9 44.8 6.8 105
Perella Xerion*** 3.4 35.3 0.3 38.8 95
Bluecrest Capital 9.3 45.4 6.3 10.8 87
Waterstone 2.4 49.3 12.1 7.5 84
Brevan Master 1.5 18.7 20.4 25.2 82
COMAC Global Macro 4.1 14.9 30.7 10.7 73
EMF Fixed Income 0.8 11.2 22.0 16.6 59
Banyan Capital 5.1 11.5 14.4 16.5 56
Capula Relative Value 6.7 12.3 9.6 18.0 55
Galena 6.3 12.7 21.6 2.9 50
Argonaut 1.5 10.1 12.3 18.1 48
King Street Capital 1.4 20.1 2.5 17.3 46
Denali Partners 9.6 4.2 19.2 6.7 45
Caxton Global 4.0 6.2 12.9 1.1 26
Brownstone Catalyst 0.6 7.5 7.0 6.8 23
*through June 2010
**total=cumulative return from January 2007 to June 2010
***YTD and total through May 2010
Source: investors
To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net
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