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Best 100 Hedge Funds


Date: Tuesday, May 21, 2013
Author: Eric Uhlfelder, Barrons

Hedge-fund manager Christian Zugel has made a mint in mortgage-backed securities, and he has also been wheeling and dealing in a lot of real estate. He has had to figure out how to fit a growing staff of 73 into a renovated garment factory, originally built by a grandfather of former Disney Chairman Michael Eisner near the Jersey shore in the town of Red Bank. Zugel also has moved into bigger quarters in London's Hanover Square, and is in the process of doubling his space in Shanghai, so his firm, Zais Group, can broaden its research and investor base around the world.

Zugel's flagship fund, the $462 million Zais Opportunity fund, is No. 1 on Barron's Hedge Fund 100 ranking for the second consecutive year, the first time any fund has posted back-to-back wins in the eight-year history of our tally. Playing a variety of mortgage- and asset-backed securities as well as collateralized loans, the Stuttgart, Germany, native, 53, posted remarkable three-year annualized returns north of 50% through Dec. 31, 2012, nearly five times better than the Standard & Poor's 500 and 13 times better than the average hedge-fund return in that time. His firm oversees $5.4 billion in all.

"Mispricing triggered by the financial crisis set up a great run for us," says Zugel, who once ran high-yield trading at JPMorgan.

 

He wasn't the only beneficiary. The revived housing market has helped drive big returns for a number of hedge funds (see the strategy returns at right). Top-performing MBS shops occupied four of Barron's first 15 spots in our Hedge Fund 100: Deepak Narula's Metacapital Mortgage Opportunities (No. 5), Don Brownstein's SPM Core (No. 9), and Russell Jeffrey's Providence MBS (No. 15) all scored big. Although not, strictly speaking, a mortgage specialist, Copenhagen's Asgard Fixed-Income fund, run by Morten Mathiesen, primarily invested in Europe's more secure covered bond version of mortgage-backeds last year, finishing at No. 8.

Non-real-estate asset-backed securities have also been delivering impressive gains. (Like MBS, their income comes from pools of payments, but from credit-card or auto-loan debt, among other forms.) This group was led by London-based Chenavari-Toro Capital fund (No. 3), which returned more than 46.54% over each of the past three years, and STS Partners (No. 7), whose returns averaged more than 28%.

In contrast to the many secured credit investors near the top of our list, the only long-short equity fund in the top 15 was ValueAct Capital Master, which averaged a 25.20% gain per year, good for No. 11.

THE STRONG RETURNS in MBS and ABS funds helped power the whole Hedge Fund 100. Overall, it delivered an average gain of 17.42%, versus the BarclayHedge average annualized return of 4.30% and S&P 500's 10.87%, as well as the Barclays US Aggregate Bond index, which returned 6.19% a year. (BarclayHedge is unrelated to the Barclays bond index.)

What distinguishes this group from their peers? Stellar returns over time, for sure. But top funds also have "excellent people, management incentives strongly aligned with investors, a disciplined process, a focus on risk and portfolio management, and a culture of innovation," says Kent Clark, who runs over $22 billion as chief investment officer of hedge-fund strategies at Goldman Sachs Asset Management. Just as important, Clark adds, is that managers continuously refine their investment process as market conditions evolve.

Barron's Hedge Fund 100 tries to identify these consistent performers. To make sure that doesn't mean simply operating in a hot industry or region, we exclude those that invest only in a single country or sector as well as narrower asset types such as commodities. So we will, for example, include a fund that invests in Asian stocks, but not one that focuses on Chinese equities alone. To target professionally run shops that offer stability and adequate liquidity, we require that funds run at least $300 million, and we assess returns over three years, instead of just one.

Our research starts with screens prepared by two hedge-fund databases, BarclayHedge (barclayhedge.com) and Morningstar (morningstar.com), which sort through thousands of funds to meet our basic criteria. We then contact the managers to verify their results. With the help of Barron's Contributing Editor Erin E. Arvedlund, we also tapped additional trustworthy sources for performance or other information that was hard to come by.

A few names stand out for consistency over time: David Tepper's Appaloosa, Ray Dalio's Bridgewater, Ken Griffin's Citadel, Michael Hintze's CQS, D.E. Shaw, Guggenheim, Steve Kuhn's Pine River, and yes, Steven Cohen's SAC, have been part of the Hedge Fund 100 several times.

One measure of how tough it is to excel: Only about 40% of last year's funds made this year's list. Another sign: Fund liquidations continued to rise from a postrecession low of 743 in 2010 to 873 in 2012. That despite net flows and appreciation of hedge funds of more than $244 billion in 2012, pushing industry assets above $2.25 trillion, according to data compiler HFR. That's a 60% gain over year-end 2008's $1.4 trillion.

WILL 2013 END the dominance of structured-credit managers like Zais? Their strong returns in 2011 and 2012 pretty much assure most a position in next year's tally, but their relative strength is likely to wane a bit in 2013.

So far through April, all fund strategies are significantly trailing the S&P 500's nearly 13% gain, though asset-backed securities and equity long-bias are neck-and-neck, with returns of 7.41% and 7.18%, respectively. The most noteworthy gainers so far have been global macro, which has risen 4.59%, and distressed securities, whose 6.84% return already exceeds its trailing three-year annual return after just four months. And returns on MBS have come back to earth, with 4.44% through April, according to BarclayHedge.

Russ Koesterich, global chief investment strategist at BlackRock, thinks foreign developed and emerging stock markets will beat the S&P 500 for the rest of 2013. Interest rates should start heading higher in the U.S. once the Fed, as it began to do recently, signals more consistently that it's going to inch away from its easy-money policies, says Koesterich, whose firm runs $3.8 trillion and has three hedge funds on our list. Higher rates obviously make it harder for fixed-income securities, including ABS and MBS, to prosper.

 

In the interim, the BlackRock strategist believes the U.S. equity rally will continue to be driven by healthy balance sheets, ultralow rates, and falling oil prices. Koesterich views U.S. megacaps as undervalued. However, international shares are even cheaper than the broad U.S. market, he says. A stronger dollar should also help foreign businesses.

As for highflying ABS and MBS, Zugel concedes that "most of the big mispricing opportunities caused by the financial crisis have pretty much corrected, pushing us to refine our search." Might be a good time to hedge.

 

Top Hedge Funds

Our Top Hedge Funds compiled a remarkable record over the three years ended in 2012: Their compound average annual return of 17.42% topped the BarclayHedge hedge-fund average return by more than fourfold and also handily topped both the S&P 500's gain and the U.S. bond market's rise in that time. Repeating in first was structured-credit specialist Zais Opportunity fund, with a phenomenal compound annual return of 52.39%, followed by global macro investor Quantedge Global, up an average of 50.07%, and asset-backed expert Chenavari-Toro Capital, up 46.54%.

 

Rank   Fund Assets   3-Yr Compound 2012   Total Firm
2012 2011 Fund Name (mil) Fund Strategy Annual Return Return Company/Location Assets (mil)
1. 1. Zais Opportunity Fund Class B $462 Structured Credit 52.39% 24.69% Zais Group / Red Bank, N.J. $5,400
2. N.R. Quantedge Global  488 Global Macro 50.07 39.46 Quantedge Capital / Singapore 488
3. N.R. Chenavari - Toro Capital IA (Euro)  362 Asset-Backed Securities 46.54 32.42 Chenavari Investment Managers / London 3,214
4. 52. AQR Global Risk Premium–Full Risk 400 Global Macro 39.20 40.80 AQR Capital Management / Greenwich, Conn. 70,700
5. 2. Metacapital Mortgage Opportunities Fund Ltd  1,440 Mortgage-Backed Securities 38.64 41.25 Metacapital Management / New York 1,600
6. N.R. Hildene Opportunities Fund Ltd  655 Distressed Securities 30.62 45.46 Hildene Capital Management / New York 1,070
7. N.R. STS Partners LP 652 Asset-Backed Securities 28.38 27.43 Deer Park Road / Steamboat Springs, Colo. 818
8. N.R. Asgard Fixed Income I Ltd (Euro)  348 Fixed-Income Relative Value 26.57 34.12 Moma Advisors / Copenhagen 348
9. N.R. SPM Core Ltd 1,831 Mortgage-Backed Securities–Agency and Non-Agency 25.88 19.65 Structured Portfolio Management / Stamford, Conn. 3,708
10. 9. VR Global Partners LP 1,816 Emerging Markets/Distressed 25.53 20.62 VR Advisory Services / Dubai 1,816
11. 26. ValueAct Capital Master 8,952 Equity Long/Short 25.20 20.40 ValueAct Capital Management / San Francisco 8,952
12. 8. Barnegat Ltd  655 Fixed-Income Arbitrage 23.85 47.57 Barnegat Fund Management / Hoboken, N.J. 655
13. 12. Pine River Fixed Income Ltd  3,538 Fixed-Income Relative Value 23.05 34.84 Pine River Capital Management / Minnetonka, Minn. 11,590
14. 43. Pure Alpha 18% Strategy 60,730 Global Macro 22.30 0.80 Bridgewater Associates / Westport, Conn. 144,000
15. 7. Providence MBS Fund Ltd  1,801 Mortgage-Backed Securities 22.16 10.94 Providence Investment Mgmt / Providence, R.I. 1,801
16. 20. Danske Invest Hedge Fixed Income Strategies  1,145 Fixed-Income Arbitrage 22.10 33.71 Danske Capital / Copenhagen 121,830
17. N.R. OxAM Quant 3,800 Quantitative Multi-Strategy 20.92 1 13.701 OxFORD Asset Management / Oxford, U.K. 3,800
18. N.R. Black River EMEA, LP 355 Emerging Market Multi-Strategy 20.22 20.84 Black River Asset Management / Hopkins, Minn. 5,500
19. N.R. Renaissance Institutional Equities Fund LLC Series BB  5,738 Equity Long-Bias 19.73 9.42 Renaissance Technologies / New York 21,637
20. N.R. Greylock Global Opportunity Ltd 3902 Emerging Market Fixed-Income 19.72 33.49 Greylock Capital Management / New York 600
21. 15. Autonomy Global Macro Ltd 2,200 Global Macro 19.68 20.60 Autonomy Capital / New York 3,300
22. 6. ECF Value Fund, LP  1,450 Event Driven 19.34 27.35 Gates Capital Management / New York 1,450
23. N.R. FORT Global Contrarian LP  308 Systematic CTA 19.16 2.83 FORT LP / Chevy Chase, Md. 437
24. N.R. Ares Enhanced Credit Opportunities 2,504 Credit Long/Short 19.14 19.07 Ares Management / Los Angeles 58,471
25. 86. All Weather @ 12% Ltd 65,034 Diversified Systematic  19.03 16.49 Bridgewater Associates / Westport, Conn. 144,000
26. 54. Silver Point Capital LP 2,600 Credit 19.00 25.14 Silver Point Capital / Greenwich, Conn. 7,200
27. N.R. Axonic Credit Opportunities Ltd  1,089 Structured Credit 18.93 25.69 Axonic Capital / New York 1,343
28. 21. Citadel Kensington Ltd 4,609 Multi-Strategy 18.89 24.83 Citadel / Chicago 13,000
29. N.R. 400 Capital Credit Opportunities LP 354 Asset-Backed Securities 18.79 34.20 400 Capital Management / New York 577
30. N.R. Waterfall Eden Fund, Ltd 489 Asset-Backed Securities 18.48 23.23 Waterfall Asset Management / New York 2,000
31. 19. NZC Guggenheim  1,262 Opportunistic Credit 18.41 21.01 Guggenheim Partners / New York 160,000
32. 27. Titan Partners, LP 625 Equity–Long Only  18.14 18.42 HHR Asset Management / Berkeley Heights, N.J. 1,871
33. 63. Drawbridge Special Opportunities   4,910 Distressed Securities 17.95 17.90 Fortress Investment Group / New York 53,430
34. N.R. BlackRock 32 Capital  716 Equity Long/Short 17.91 8.77 BlackRock / New York 3,792,000
35. N.R. AHL Evolution Ltd 2,000 Diversified, Systematic 17.87 23.62 AHL / London 14,400
36. 42. Third Point Offshore 10,100 Multi-Strategy 17.49 21.50 Third Point / New York 10,100
37. N.R. Angelo Gordon Mortgage Value Partners LP 3,180 Distressed Credit 17.10 20.60 Angelo Gordon / New York 25,000
38. N.R. Seer Capital Partners LP  1,388 Securitized Credit 17.08 25.86 Seer Capital Management / New York 1,537
39. 45. CQS Directional Opportunities (USD) 1,567 Multi-Strategy 16.98 35.94 CQS / London 12,000
40. N.R. GoldenTree Credit Opportunities Ltd 1,310 Credit Long/Short 16.94 17.70 GoldenTree Asset Management / New York 16,700
41. 14. GLG Market Neutral Fund (USD) 836 Diversified Credit 16.82 18.40 GLG Partners / London 26,600
42. 10. Palomino Fund–Class B 5,100 Credit/Global Macro 16.82 29.27 Appaloosa / Short Hills, N.J. 14,400
43. 46. Guggenheim Partners Opportunistic Investment-Grade Securities 1,961 Structured Credit 16.67 15.05 Guggenheim Partners / New York 160,000
44. N.R. GLG European Distressed–Class A 548 Distressed Credit 16.34 17.92 GLG Partners / London 26,600
45. N.R. Cevian Capital II Ltd (USD hedged) 7,432 Operational Activist 16.20 22.40 Cevian Capital / London 8,580
46. 56. Omega Overseas Partners Ltd 7,007 Equity Long/Short 15.56 29.70 Omega Advisors / New York 7,007
47. N.R. Napier Park Mortgage Credit Opportunity  452 Mortgage-Backed Securities 15.40 26.83 Napier Park Global Capital / New York 6,400
48. N.R. BlackRock Fixed-Income Global Alpha  3,786 Diversified Fixed-Income  15.17 14.37 BlackRock / New York 3,792,000
49. 84. Quaesta Capital Bond Global Select  604 Macro 15.11 19.13 Quaesta Capital / Frankfurt, Germany 793
50. N.R. Good Hill Overseas Ltd  342 Asset-Backed Securities 15.00 11.96 Good Hill Partners / Westport, Conn. 381
51. 85. Halcyon Off-Shore Asset-Backed Value Ltd  2,600 Distressed Asset-Backed Securities 14.86 16.13 Halcyon Asset Management / New York 12,000
52. N.R. Redwood Offshore Ltd $4,300 DistressedCredit 14.86% 23.40% Redwood Capital Mgmt / Englewood Cliffs, N.J. 5,000
53. N.R. Oculus 9,000 Discretionary Macro 14.82 20.00 D.E.  Shaw / New York $20,000
54. N.R. Children's Investment Fund 4,944 Equity Long/Short 14.74 29.52 TCI Fund Management / London 8,200
55. N.R. PanAgora Diversified Risk Multi Asset   2,126 Global Macro 14.49 14.29 PanAgora Asset Management / Boston 28,700
56. N.R. Cassiopeia Fund - Class B 689 Volatility Arbitrage 14.47 25.38 Dominicé & Co Asset Mgmt / Geneva 747
57. 62. Obsidian 810 Fixed-Income Relative Value 14.34 34.28 BlackRock / New York 3,792,000
58. N.R. Premium Point Mortgage Credit 811 Mortgage-Backed Securities 14.33 25.72 Premium Point Investments / New York 1,577
59. N.R. Lone Kauri 3,897 Equity Long/Short 14.24 27.70 Lone Pine Capital / Greenwich, Conn. 17,000
60. 93. Litespeed Offshore Ltd  1,366 Event Driven 14.08 21.84 Litespeed Management / New York 1,366
61. N.R. Citadel Global Equities Ltd 2,132 Equity Long/Short 14.00 16.90 Citadel / Chicago 13,000
62. N.R. Adage Capital Partners 18,200 Equity Long/Short ex Small Cap 13.70 20.80 Adage Capital Management / Boston 27,245
63. 69. Rimrock High Income PLUS Ltd 1,322 Credit Long/Short 13.68 14.34 Rimrock Capital Management / Irvine, Calif. 2,320
64. N.R. MW Global Opportunities 1,552 Equity Long/Short 13.64 6.83 Marshall Wace / London 8,345
65. N.R. Blue Harbour Strategic Value Offshore Ltd 1,100 Activist 13.61 16.20 Blue Harbour Group / Greenwich, Conn. 1,300
66. 17. Pine River Ltd  1,628 Global Multi-Strategy Relative Value 13.59 21.75 Pine River Capital Management / Minnetonka, Minn. 11,590
67. N.R. Ellington Credit Opportunities Ltd 463 Mortgage-Backed Securities 13.53 27.73 Ellington Management Group / Old Greenwich, Conn. 4,900
68. N.R. Visium Global Offshore Ltd 500 Multi-Strategy 13.40 19.53 Visium Asset Management / New York 4,000
69. N.R. Solus Sola Ltd 1,112 Event Driven/Distressed 13.38 11.56 Solus Alternative Asset Management / New York 3,021
70. N.R. III Fund Ltd Series 1 5963 G7 Sovereign and Agency Debt 13.06 11.83 III Associates / Boca Raton, Fla. 2,296
71. 60. Friedberg Global Macro, Ltd  878 Global Macro 12.71 -8.72 Friedberg Mercantile Group / Toronto 2,788
72. N.R. JANA Nirvana Offshore Fund, Ltd 547 Event Driven 12.70 33.31 JANA Partners / New York 3,951
73. 36. PH&N Absolute Return Fund  769 Multi-Strategy 12.63 10.81 RBC Global Asset Management / Vancouver 286,900
74. N.R. Echo Street Capital Partners LP  4844 Equity Long/Short 12.47 16.60 Echo Street Capital Management / New York 484
75. 40. Glenview Offshore Opportunity Ltd 937 Equity Long/Short 12.30 53.80 Glenview Capital Management / New York 4,530
76. N.R. III Relative Value Credit Strategies Ltd Series 2 5535 Relative Value Credit 12.27 10.22 III Associates / Boca Raton, Fla. 2,296
77. 24. Cambrian Fund Ltd 776 Equity–Long Only 12.22 8.31 Atlantic Investment Management / New York 1,777
78. 18. Serengeti Opportunities 643 Event Driven 12.20 13.40 Serengeti Asset Management / New York 1,124
79. 25. GoldenTree Master 2,939 Credit Long/Short 12.17 14.49 GoldenTree Asset Management / New York 16,700
80. 61. Teton Capital Partners, LP 546 Equity Long/Short  12.16 22.25 Ancient Art / Austin, Texas 546
81. N.R. Fir Tree Value LP 6,121 Opportunistic Value 11.97 17.38 Fir Tree / New York 8,848
82. N.R. CQS ABS Ltd Class B (USD) 2,433 Asset-Backed Securities 11.92 16.86 CQS / London 12,000
83. N.R. Perella Weinberg Partners Asset-Based Value LP  871 Distressed Securities 11.87 10.49 Perella Weinberg Partners Capital Mgmt / New York 8,500
84. 29. Discovery Global Opportunity Ltd 6,232 Global Macro/Equity Long-Short 11.85 15.05 Discovery Capital Mgmt / South Norwalk, Conn. 8,560
85. N.R. Waterfall Victoria Ltd 466 Mortgage-Backed Securities–Non-performing 11.84 14.51 Waterfall Asset Management / New York 2,000
86. N.R. Dymon Asia Macro 2,535 Asian Global Macro 11.80 1.00 Dymon Asia Capital / Singapore 2,800
87. N.R. GMO Emerging Country Debt LP 978 Emerging Sovereign 11.78 20.50 Grantham, Mayo, Van Otterloo / Boston 106,200
88. N.R. SAC Capital International 9,000 Equity Long/Short 11.75 14.00 SAC Capital Advisors / Stamford, Conn. 15,000
89. N.R. Newbrook Capital Partners 540 6 Equity Long/Short 11.70 10.40 Newbrook Capital / New York 685
90. N.R. Dorsal Capital Partners, LP  735 Equity Long/Short 11.59 11.25 Dorsal Capital Management / Redwood City, Calif. 735
91. N.R. MidOcean Credit Opportunity LP 441 Credit Long/Short 11.55 10.77 MidOcean Partners / New York 638
92. N.R. Value Partners High-Dividend Stocks Fund  880 Emerging Markets –Asia 11.49 24.97 Value Partners Limited / Hong Kong 7,900
93. N.R. Marathon EM Opportunity 320 Emerging Market Credit 11.48 4.90 Marathon Asset Management / New York 10,800
94. N.R. Eagle Global Ltd 387 Diversified Systematic 11.46 8.10 Eagle Trading Systems / Princeton, N.J. 2,578
95. 16. Element Capital Ltd  3,939 Global Macro 11.42 2.74 Element Capital Management / New York 3,939
96. N.R. Fir Tree Capital Opportunity LP 1,550 Credit 11.41 12.70 Fir Tree / New York 8,848
97. N.R. First Quadrant Essential Beta–10% Volatility 565 Long-only futures and options 11.38 7.88 First Quadrant / Pasadena, Calif. 17,105
98. 94. Contrarian Capital Fund I 2,100 Distressed  11.36 24.54 Contrarian Capital Management / Greenwich, Conn. 3,200
99. N.R. PIMCO PARS V Master Ltd 367 Global Fixed-Income 11.30 15.90 PIMCO / Newport Beach, Calif. 2,000,000
100. N.R. Whitebox Concentrated Convertible Ltd 303 Convertible Arbitrage 11.28 9.50 Whitebox Advisors LLC / Minneapolis 2,311
    Barron's Top 100 Hedge Fund Average     17.42 20.28        
    BarclayHedge Fund Index Average     4.30 8.25        
    S&P 500 Average     10.87 16.00        
    Barclays U.S. Aggregate Bond Index Average     6.19 4.21        
Assets as of December 2012. Fund assets include both on- and off-shore funds. Fund Name: When there are on- and off-shore funds, the performance cited is the larger of the two funds, with LP typically indicating on-shore and Ltd indicating off-shore. N.R.=Not Ranked. 1 -Oxam's 2012 data for both performance figures are only through October 2012. 2-Greylock Global Opportunity has $150M in the fund with $240M in two SMAs that are run pari passu.3-III Ltd has feeder funds assets of $262M plus $334M in private funds and SMAs that are run pari passu. 4- Echo Street Partners assets include the LP fund of $98M, QP (qualified purchaser) fund of $146M, and one SMA run pari passu valued at $240M. The LP, despite being smaller, is the source for performance because the QP doesn't have three years of history.5-III RVCS has $177M in the fund, and $376M in private funds and SMAs that are run pari passu. 6-Newbrook Capital's fund assets are as of December 2011. Sources: BarclayHedge and Morningstar