Some smaller hedge funds outshine their bigger rivals

Date: Tuesday, August 7, 2012
Author: Svea Herbst-Bayliss, Reuters

A number of hedge fund industry spin-outs are showing up their bigger and better-known brethren by delivering eye-popping returns in a year marked mainly by lackluster performance.

After a horrible 2011, this year is not shaping up to be much better in the $2 trillion hedge fund industry, with the average fund up only 2.10 percent through June.

But a handful of new funds, run by managers who had worked at some of the most prominent names on Wall Street and in the hedge fund industry in recent years, is doing very well with double-digit returns.

Mick McGuire is the founder of Marcato Capital Management in San Francisco, which specializes in selecting stocks. Only a short time after leaving William Ackman's $10 billion Pershing Capital Square Management, McGuire is posting the kind of returns that would make any parent proud. Ackman has invested as has the Blackstone Group (BX.N), one of the world's most powerful hedge fund investors.

Since January, Marcato Capital Management has gained 17.6 percent, ranking it among the industry's very best performing hedge funds this year, according to a person familiar with his numbers through the end of July. McGuire could not be reached for comment.

For years, academic research has shown that smaller funds, often with younger and hungrier managers at the helm, have outperformed their bigger peers because they can be more nimble.

Numbers from Marcato Capital Management and others seem to be underscoring those findings.

Some of McGuire's fuel has surely come from the firm's biggest position: Corrections Corp of America (CXW.N), whose stock price has climbed 53 percent since January.

By comparison, McGuire's former employer, Pershing Square Capital Management, is looking less dynamic with only a 3.3 percent gain for the first six months of the year.

Pershing Square's numbers through July are not yet known.

McGuire, whose assets under management hit $675 million on August 1, also handily outpaced David Einhorn's Greenlight Capital, another closely followed and prominent fund with about $8 billion under management. Greenlight gained 2.7 percent in July and is up 6.4 percent for the year.

In July, when the S&P 500 Index .SPX .INX gained 1.3 percent, McGuire's fund rose 4.4 percent. That puts him in lofty territory for a month in which the risk on/risk off environment likely hurt many managers, industry investors said.

Performance numbers are often highly guarded secrets in the hedge fund industry, and tracking groups that put together industry benchmarks are not expected to release their numbers until early next week.

"Part of the reason these smaller managers can do well is because of size," said Charles Gradante, who co-founded the Hennessee Group, which invests with hedge funds. "You can make more concentrated bets while staying on the radar when you are small and you can unravel them better when you need to."

POKER PLAYER

McGuire is not the only newcomer hitting home runs.

Mudrick Capital, run by Jason Mudrick, who spun out of Contrarian Capital and oversees some $250 million in assets, is up 12.99 percent for the first seven months of the year, said a person familiar with the numbers.

In July, Mudrick Capital gained 2.85 percent, making it the strongest month this year, since a 4.14 percent rise in January. Mudrick, who earned a law degree from Harvard and spends some evenings as a competitive poker player, makes long and short investments in distressed leveraged loans, distressed bonds and post-bankruptcy securities. He launched his fund with a few million dollars in July 2009.

Mudrick could not be reached for comment.

Similarly, some five years after the so-called quant quake when many quantitative funds stumbled badly, Mark Carhart is back with a fund of his own and strong numbers. Carhart formerly co-managed Goldman Sachs' vaunted $10 billion Global Alpha fund, which ran into big trouble during the August 2007 turmoil.

Carhart's Kepos Capital, which relies on computer-driven trading models to make macroeconomic bets on currencies and other instruments, climbed 5.2 percent in July. The fund, which now has some $750 million in assets under management, is up 11.2 percent for the year, said a person who has seen his numbers.