Hedge funds fail to wow in first half

Date: Friday, July 6, 2012
Author: Svea Herbst-Bayliss, Reuters

Hedge funds have little to brag about halfway through 2012, with some of the industry's biggest names reporting only small gains and trailing the benchmark U.S. stock index by a wide margin.

Paul Tudor Jones' flagship fund is up 1.59 percent through the third week in June and David Einhorn's biggest portfolio is up 3.7 percent in the first half, while Daniel Loeb told investors that his largest fund rose 3.9 percent during the first six months of 2012, investors in the funds said.

Compared with a year ago when many hedge funds were losing money, these returns might be something to cheer, especially since they beat the benchmark HFRX Global Index's 1.22 percent gain.

But they pale measured against the 8 percent rise in the Standard & Poor's 500 stock index during the first half, with the $2.1 trillion industry failing to wow at a time that public pension funds are increasingly turning to hedge funds to shore up returns.

The industry's underperformance may again raise questions whether it makes sense for institutional investors to pay hefty fees to hedge funds when they can earn better returns from low-cost index funds. Unlike most other portfolios, hedge funds take a management fee plus a performance fee that is often 20 percent or more.

EUROPE HURTS AGAIN

Europe's seemingly endless debt crisis is getting much of the blame for the year's anemic returns, but concerns about U.S. growth and how China will perform are also making for uncertain trading conditions, experts said.

With the steady stream of European news making for what traders are calling excessive volatility in the short term, hedge fund managers betting on big events are having a tougher time, experts added.

"People are over-managing their positions," said Peter Rup, chief executive and chief investment officer at Artemis Wealth Advisors, saying that funds moved to short positions only to see those turn against them when markets rebounded after having tumbled.

So-called global macro funds that bet on big interest rate and currency movements were the worst performers during the first half, dipping into the red for the year thanks to currency trading losses in late June.

Brevan Howard's flagship fund was off 3 percent halfway through June, an investor in the fund said. Robert Gibbins' Autonomy Capital has delivered strong gains, however, climbing 3.4 percent in June and 8 percent for the year, an investor in the fund said.

BRIGHT SPOTS

There were other bright spots as well, with some managers who specialize in selecting stocks making savvy picks and some managers specializing in credit also performing well.

Leon Cooperman's Omega Advisors Inc was up 10 percent in the first half, benefiting from its long-time investment in student lender Sallie Mae, whose shares have rebounded recently.

Marcato Capital Management, founded by Mick McGuire after he left Bill Ackman's Pershing Square Capital Management, jumped 12.7 percent in the first half.

Andor Capital Management, run by technology investor Dan Benton, who recently came out of retirement, is up 6 percent, while Steven Cohen's SAC Capital Advisors, one of the industry's most closely watched funds, was up 5.2 percent in the first half.

Boaz Weinstein's Saba Capital, which took the other side of some of the trades that resulted in huge losses for JPMorgan Chase & Co was up 2.3 percent through the third week of June. Blue Mountain, another fund that also made money on the other side of JPMorgan's failed trades, was up 9.54 percent through the third week of June, a person familiar with the numbers said.

Some global fixed income strategies also worked for managers, with Brian Taylor's Pine River Capital Management attracting positive attention. Its Pine River Fixed Income fund, managed by Steve Kuhn, is up 13.76 percent this year while its Pine River fund, managed by Aaron Yeary, is up 9 percent.

And Kenneth Griffin, another one of the industry's biggest players, again put up strong numbers when Citadel's main funds notched a 9 percent increase in the first half.

WINNERS NO MORE

There are losers as well, including the two men who made the most betting against the subprime mortgage market. Philip Falcone, now being sued by financial regulators and often slow in releasing his numbers, told investors his Harbinger II fund was off 33 percent during the first five months of 2012. John Paulson's Advantage Plus fund was off 10 percent through the first five months of the year.