August sell-off hits big hedge fund names hard

Date: Wednesday, August 10, 2011
Author: Svea Herbst-Bayliss and Lauren Tara LaCapra, Reuters

Sell-off is making losers out of long-time winners

* Investors putting in redemptions in case slide deepens

BOSTON/NEW YORK, Aug 9 (Reuters) - August is not even two weeks old and for top hedge fund traders like Steven Cohen, John Paulson and Bill Ackman it could be a month to forget.

Even Cohen, one of the industry's titans, hasn't escaped the global sell-off -- his $14 billion SAC Capital is down 4 percent this month.

Still after SAC's poor start to the year, the fund is still in the black with a roughly 6 percent gain this year.

That's not the case for John Paulson, whose two flagship funds had suffered steep losses even before the month began. The Paulson's Advantage funds lost more than 10 percent in the last week, bringing total losses in the two portfolios, which oversee about $17 billion of investor money, to more than 25 percent.

The brutal global stock sell-off is quickly turning hedge funds that had been up for the year into losers. Meanwhile, funds that entered August already down for the year are piling up even more red ink.

But just as quickly as the Dow Jones industrials plummeted 6.7 percent on Monday, the index climbed back 4 percent on Tuesday, creating ever more uncertain trading conditions for even the savviest stock pickers.

Industry observers say the way things are headed, many funds may post double digit losses for August.

But so far, there appear to be few large hedge fund blowups because many managers were already reducing their stock holdings going into the summer given concerns about Europe's debt crisis, the sluggish U.S. economy and the political impasse over the U.S. debt ceiling.

The carnage, for the moment, appears confined to small and lesser known funds that can't weather a big loss.

"There have been a number of blowups in the past week, particularly small hedge funds in the volatility options arbitrage space," said Evan Rapoport, chief executive of HedgeCo Networks, which helps clients invest with funds and runs a hedge fund.

Just the same, few big fund managers are rejoicing. Indeed, Bill Ackman and David Einhorn, already nursing losses in their funds through July, likely got hit hard when financial stocks and nearly everything else tumbled, people familiar with the numbers said.

For instance, Ackman's Pershing Square Capital Management, which was down 4.2 percent at the end of July, likely is feeling more pain because some of the activist investor's biggest holdings have been getting crushed in August. The fund's biggest holding, JC Penney (JCP.N), is down 16.7 percent this month. Shares of Citigroup (C.N), another big holding, are down 27 percent.

But there are also some winners among the wreckage, including global macro player Brevan Howard, which gained 2 percent through Friday, and probably some managers who stuck with gold bets, benefiting from the metal's new highs.

John Thaler and Chase Coleman, who both trace their investing roots to industry legend Julian Robertson, are seeing green. Thaler's JAT Capital was up 32.5 percent through the end of July and Coleman's tech-oriented fund, where short positions were delivering much of the gains, was up about 30 percent as well.

Dan Loeb's Third Point Ultra fund is also still up after gaining 9 percent through July.

But it's not just poor performance that worries investors. Another concern is redemptions and whether managers will be forced to sell shares to raise cash to pay fleeing investors.

With the deadline for submitting end-of-third-quarter redemptions fast approaching, some investors say they are readying a run toward the exits. Brad Balter, managing partner of Balter Capital Management, says some investors are putting in redemption notices to protect themselves in case the numbers get worse.

Paulson, who is unaccustomed to big losses, is moving quickly to calm the nerves of his investors. In an unusual move, he sent a letter to some of his investors on Aug. 5, saying that quarterly redemption requests were running lower than normal.

In the letter, Paulson said redemptions requests for the period ending Sept. 30 represent about 1.2 percent of firm's $35 billion under management, or roughly $420 million.