Hedge fund giants are coming up small this year |
Date: Wednesday, July 6, 2011
Author: Svea Herbst-Bayliss, Reuters
* Losses at big-name funds startle investors BOSTON, July 5 (Reuters) - The first half of 2011 has been humbling for many
of the $2 trillion hedge fund industry's biggest stars, with the likes of John
Paulson, David Einhorn, and Louis Bacon losing money for their investors' money
while underperforming the major U.S.
stock market indexes. At the year's half-way point, the average hedge fund was off 2.12 percent,
preliminary data from Hedge Fund Research show. By contrast, the Standard &
Poor's 500 gained 6 percent. Only six months ago, few investors would have forecast that as of June 30,
Paulson's flagship Advantage Fund would have lost 15 percent, or Einhorn's
Greenlight Capital would be down 5 percent. Even Louis Bacon's flagship Moore
Global fund, which has boasted average annual returns of 19 percent for more
than two decades, was down 5 percent for the year through June 16. The lackluster performances from so many top managers come at a time when the
hedge fund industry is perceived to be roaring back to life following the
financial crisis. In the first quarter of 2011 alone, hedge funds took in $32 billion in new
money from pension funds and other institutional investors, more than half the
amount added during the entire year of 2010. Thanks to fresh demand, especially
from pension funds, the industry now manages more money than it did before the
beginning of the crisis during the summer of 2007. Yet these men and other so-called smart-money traders showed themselves to be
quite fallible this year when it came to navigating the fallout from events like
Japan's earthquake and nuclear disaster, the uneven U.S. economic recovery,
enormous volatility in commodity prices and ongoing concerns about
Greece and the solvency of other European nations. Some presumably savvy traders also have stumbled over bad bets entirely of
their own making. Paulson's $37 billion hedge fund empire has been pounded by a disastrous $500
million loss on Chinese forestry company Sino-Forest (TRE.TO)
whose financial statements have been called into question by a well-known short
seller. "The glory boys have had a tough time lately," said Charles Gradante,
co-founder of Hennessee Group, which invests with funds and tracks industry
performance. Poor performance is sparking worry that unless these managers turn things
around soon, some of the industry's biggest names will be hit with redemption
notices in the second half of the year. A wave of requests from investors to get
some, if not all, of their money back could force some managers to quickly
liquidate positions to return cash fast. EYES ON PAULSON Right now a lot of eyes are on Paulson & Co. Investors in his $18 billion
flagship strategy have until the middle of August to decide whether they want to
redeem some of their money by the end of the third quarter. Up until now, most
Paulson investors have been loyal to the billionaire trader, given that he has
earned them an average 20 percent a year in the past. To be sure, six months is nearly an eternity on Wall Street and plenty of
time for managers to post healthy gains. Indeed William Ackman, whose Pershing Square Capital has delivered an average
annual gain of 19 percent until now and is often down early in the year, was off
2.27 percent during the first first 5-1/2 months of the year. Digging into the mid-year numbers, it appears many funds were fairing poorly
thanks to one brutal month. Overall, funds were down 2.09 percent in June,
marking their biggest decline this year, data from Bank of America Merrill Lynch
analysts show. The bulk of hedge funds pursue an equity long/short strategy and
these funds, on average, lost 3.07 percent in June, the analysts said, noting
that only equity market neutral funds, as a group, posted positive returns in
June. More detailed data will be released later this week. Even Dan Loeb, whose Third Point, has been one of the industry's top
performers, took a mighty blow in June because of a big bet on gold, said one of
his investors, who is prohibited to discuss performance publicly. Loeb's main
fund fell 2.9 percent in June, slimming the year's gains to 6.3 percent. Another fund trading higher this year is $2 billion Autonomy Global, a
so-called global macro fund which bets on currencies and
bonds and is up 4.5 percent this year. For many managers, the hardest thing to gauge correctly this year has been
the roller-coaster nature of the global economic recovery. Funds positioned to
profit from an economic rebound by betting heavily on bank
stocks and consumer products manufacturers were whipsawed by global events. GREECE IS THE WORD Yet ironically, Greece, one of the biggest financial headaches of the year,
has been hard for many hedge funds to profit from. Industry experts say managers
of big funds have refrained from betting against Greek sovereign debt in part
because they don't want to be seen as profiting from the misery of the
cash-strapped nation. Managers, already battling a reputation of acting like
heartless vultures, are wary of being demonized by politicians for betting on a
Greek default. So as an alternative to betting directly on a Greek default, some funds have
opted for proxy trades that include wagering against the euro
currency or shorting shares of European banks with big exposure to Greek
debt. Now with a potential deal to allow the Greek government more time to pay
down its debts, a few funds are going "long" Greece in the hopes of catching the
rebound. One such fund is Boaz Weinstein's $3.4 billion Saba Capital Management, which
has been buying long-dated Greek bonds that are selling for about 40 cents on
the dollar, said a person familiar with the fund's strategy. The former Deutsche
Bank bond trader is said to favor Greece's 30-year sovereign debt because it
sells at a substantial discount to the nation's short-term debt notes. A person familiar with the trade said Saba is simultaneously buying so-called
recovery swaps on those Greek bonds, a derivative that effectively locks in the
price a bond would fetch in the event of a default. In the case of Greece,
recovery swaps on the nation's 30-year sovereign bonds are selling for about 37
cents on the dollar. Industry analysts say most hedge funds are shying away from the kind of Greek
trade that Saba Capital, up about 3.5 percent this year, is doing because of the
risk. But with six months to go in the year, it appears many top managers will have
to take on quite a bit of risk if they want to end 2011 firmly in the black.
* Lackluster performance could translate into redemptions
* Managers may have to take more risk to get into black