Wednesday, February 01, 2012
Well, thank God that’s over.
Last year may not have been quite as harrowing as 2008, but it was still pretty scary. Only a select few hedge fund managers made money, and hedge funds took a reputational beating for their lackluster results. It does make you wonder how much longer investors are going to pay hedge fund fees for returns that don’t beat the market — or protect on the downside.
One notable stumble came from King Street Capital Management. True, the firm’s flagship fund fell by only 1.2 percent in 2011, and it was the first down year in King Street’s 17-year history, as our profile on page 40 explains. But the firm is sitting on a large pile of cash. And although that move may have protected King Street from a much larger loss last year, some investors are getting antsy and putting pressure on the firm’s highly secretive founders to start investing again.
Caxton Associates fared pretty well in 2011, returning 0.70 percent. But for the past three years, Caxton didn’t come anywhere near the stellar returns the firm achieved in its early days. Now its legendary founder, Bruce Kovner, has retired, and his successor, Andrew Law, has taken over. As our cover story on page 22 shows, Law steered the firm safely around disaster in 2008 with deft trading; it remains to be seen whether he can return the firm to its former double-digit glory.
That Caxton made its best returns in its early years is true of the entire industry — or so says Simon Lack, whose provocative new book, The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True, is excerpted beginning on page 46. Investors were so starstruck by these heady returns and genius managers that they failed to negotiate for fairer terms, he argues, and the result is an unfair split of the profits that continues to this day. That matters more than ever now that public pension plans are piling into hedge funds, Lack says. If hedge fund managers don’t get it together, and fast, 2012 could be the year that investors occupy hedge funds.
Friday, December 09, 2011
William Browder, founder of Hermitage Capital Management, made his name as a bulldozing activist investor in Russia, waging rancorous and highly public battles against corruption and mismanagement in that country’s companies. For his trouble, Browder was barred from reentering Russia in 2005. These days he’s best known for his equally aggressive human rights campaign on behalf of his former lawyer, Sergei Magnitsky, whom Browder maintains was wrongfully imprisoned in Russia as his proxy. Magnitsky died in prison in November 2009 after months of neglect and mistreatment.
But as our cover story on page 26 explains, Browder is juggling that mission with the day-to-day business of running his firm. Now based in London, Browder is trying to reinvent himself as a global emerging-markets investor. The transformation hasn’t been easy: Once a $4.5 billion firm, Hermitage is down to $850 million, and its global emerging-¬markets fund has delivered an annualized loss since its inception in April 2007.
Browder’s struggles may seem familiar to other hedge fund managers, who are fighting battles of their own. On the investing front, many are laboring in the volatile market environment, as our profile of longtime commodity futures trader Patrick Welton on page 48 shows. The manager’s flagship fund has produced double-digit gains in all but one year since its 2004 launch. In 2011, however, the fund was down by more than 13 percent through October, with market swings tripping up its normally sound models.
On the political front, successful hedge fund managers and other wealthy financiers are facing the wrath of protesters around the globe who are fed up with the widening gap between the rich and the poor, and the bailout of Wall Street banks. But as our story on the Occupy Wall Street movement, on page 22, points out, some hedge funders identify with the protesters, and a handful have given them advice and money.
Some managers are starting to agree with the protesters’ argument that the system is rigged. Take the recent bankruptcy of MF Global. The bankruptcy trustee assigned to the case revealed that as much as $1.2 billion or more of client money has gone missing. That money was supposed to have been kept separate from the firm’s own, raising questions about whether the brokerage intentionally and illegally dipped into client funds. One customer has formed a coalition to make sure the money is returned to its rightful owners and has vowed to fight MF Global’s creditors in court. See page 5 for more on that story.
The mess could take years to unravel. But however the MF Global drama and the protest movements play out, let’s hope the result is a banking system that’s less prone to corruption. After all, no one wins in a system designed to enrich a few at the expense of many.
Tuesday, November 01, 2011
Sometimes it seems the hedge fund industry is the victim of its own hype. Whenever there’s a downturn, the scary truth gets whispered: There are no geniuses out there.
John Paulson’s dreadful performance this year serves as a reminder of this maxim. Paulson’s fame is based on a brilliant short bet on the housing market that overnight turned his firm into one of the biggest — and made him an instant billionaire.
As has happened often in the hedge fund world, the extraordinary profits made during a single year were based on market anomalies that don’t last forever. Yes, Paulson timed the recovery right and bet correctly on the rise of gold. But he appears to have succumbed to the hubris that affects so many, as he refused to change his views earlier this year when the markets went against him.
Paulson is hardly alone in 2011, as most hedge funds have had a tough year even as money has continued to flow into the industry. The bigger the industry gets, the more it seems to correlate with the overall market. Take long/short equity. Over the past year the AR U.S. Equity Index has correlated 97 percent with the Standard & Poor’s 500 index.
In recent years investors flocked to big funds like Paulson’s while starving smaller funds of capital. There are advantages to size but disadvantages as well. So maybe it’s time to take a look at the little guys. In our “Funds to Watch” feature, starting on page 49, we highlight five that are promising, including Hildene Capital Management, the subject of our Niche profile last month. Hildene has found a classic route to hedge fund riches: an esoteric strategy no one else has discovered.
Such strategies are great to find, but they do have a time limit. The trick is making the leap to a broader stage, a move that has bedeviled many a great manager. Think about convertible arbitrage. During the 1990s pioneers like Harlan Korenvaes of HBK Capital Management and Kenneth Griffin of Citadel minted money in that area. Then the field was overrun by a slew of hedge funds, and it became harder to profit. As the difficulties that have beset both HBK and Citadel remind us, figuring out the next step is the tough part.
Saturday, October 01, 2011
At midyear, U.S. hedge fund assets had jumped $102 billion to nearly $1.4 trillion. Although that’s shy of the roughly $1.7 trillion hedge funds managed in 2008, our biannual Billion Dollar Club survey shows, it’s still about $300 billion more than the nadir three years ago. The first half was so bullish that a couple of the highest flyers—Third Point and Davidson Kempner Capital Management—even closed off funds to new investment.
Hedge funds seemed firmly on their way back until the market collapse of August, which has stretched into autumn. The AR Composite Index was barely above water, up 0.41% at the end of August.
With markets so out of whack, it’s no surprise that the biggest names in hedge funds keep cashing it in, starting with Stanley Druckenmiller last year. This summer, George Soros decided to turn his fund into a family office, and in September, Bruce Kovner announced he would retire and turn Caxton Associates over to his lieutenant, Andrew Law. It is somewhat dispiriting that the giants are leaving the game, but their protégés are picking up the slack. Notably, an alum of Druckenmiller’s Duquesne Capital Management launched a fund, PointState Capital, which quickly amassed $5 billion. That made PointState one of the biggest gainers in this month’s survey.
Despite the grim financial news, there doesn’t seem to be a lot of panic in the air, as was the case three years ago at this time. One reason may be that hedge funds have turned so risk averse. Leverage is low, cash is king and the losses have so far been manageable.
Investors seem to be taking something of a wait-and-see attitude. Redemptions, while at a 12-month high in September, so far are running well below the 2008 period. In September, forward redemptions, as measured by GlobeOp Financial Services, were only 3.11% of assets it administers, compared with 19.27% in November 2008.
At this writing, it’s still too early to judge what will happen on September 30, when many would have to put in redemptions for the end of the year. But a massive outflow seems unlikely. Even if more of the legends retire, their investors will have to go somewhere.
Thursday, September 01, 2011
This September marks the 10th anniversary of the 9/11 terrorist attacks on the World Trade Center, a devastating event that ushered in a series of terrible U.S. policy decisions from which we’ve arguably not quite recovered. Without the more than $1.2 trillion spent to finance the wars in Iraq and Afghanistan—and the deep political schism that they’ve wrought—would the U.S. debt have been downgraded last month? Would the Fed have kept printing money to keep the economy and Wall Street afloat until it burst some seven Septembers later? (And then there was more money to patch that up, of course.)
Those of us who live in New York recall how fragile our world seemed right after September 11, 2001. That perception was often reinforced during the ensuing decade—as well as this summer. But if ever there was a beneficiary of all the uncertainty, it was hedge funds. Institutional investors that saw their portfolios decimated between 2000 and 2003 began the desperate search for yield that led them into the arms of hedge funds, creating a $2 trillion industry.
Hedge funds proved a good choice: They survived the next calamitous September—that of 2008—better than most financial players. True, many didn’t survive, but overall, hedge fund returns didn’t fall as much as the major indices. The next September—2009—AR Magazine launched in the belief that the institutional march into hedge funds would continue and the industry would flourish.
Now comes September 2011. Hedge fund returns have been paltry so far this year; the AR Composite Index gained a mere 2.2% through July. Some major funds have had trouble coming to terms with the new political paradigm in our post-2008 world—and were either wrong about markets or overly cautious. But as we report in our “Armageddon Now!” in-depth analysis, the pessimism that kept hedge fund managers from benefiting earlier in the year may soon pay off.
Investors will be watching. Since 2008, they’ve been judging hedge funds in large part by how they behaved during the financial turmoil. Those who gated or side-pocketed continue to earn investors’ ire. But for the first time, those polled in our Hedge Fund Report Card (whose results are in this issue) say their main concern in rating hedge funds is performance. Really, it’s all about the money. Even the now-defeated, now-deceased Osama bin Laden knew that much.