Hedge funds make wrong calls on market mayhem

Date: Monday, August 15, 2011
Author: Sean Farrell, The Independent

Europe's bans on short selling cast hedge funds in their usual role as shadowy bogeymen, profiting from the misfortunes of others, but some of the world's biggest funds have taken a bath amid the wreckage, it has emerged.

The biggest name to suffer is John Paulson, the US investor who made billions by taking short positions against US sub-prime mortgages before the credit crunch erupted. Mr Paulson's Advantage funds, which oversee about $17bn ($10bn), are down about 10 per cent this month and 31 per cent this year. After making his fortune by betting against the financial sector, Mr Paulson is losing money for his clients because he invested in a US recovery with big holdings in Bank of America and Citigroup.

Other US titans to feel the heat include William Ackman, whose Pershing Square fund is down about 10 per cent this year. In the UK, Lansdowne Partners' UK Equity Fund fell 4.4 per in the week ended 5 August and is down 16 per cent this year.

John Godden, the head of IGS, the hedge fund consultant, said: "There are a number of managers who are long the wrong things or short the wrong things at the moment. They have been hurt and they are no different from any other investor."

As always, there have been winners. Brevan Howard, the giant UK-based fund, was up 2 per cent on the week last Friday and 7 per cent on the year. The "macro" fund bets on broadeconomic trends, giving it room for manoeuvre. 36South, the UK-based "doomsday" fund, is also ahead.

Mr Godden said hedge funds would outperform clients' equity holdings in July and August and that the sector was not in crisis. "It will be a fairly short, sharp loss in asset value, but some of the big names fabled for getting it right more than not have got it wrong this time."