Friday, October 26, 2012

Hedge Funds Belt Few Home Runs?

Gregory Zuckerman and Juliet Chung of the WSJ report, Hedge Funds Belt Few Home Runs:
They are the few. The proud. The hedge-fund managers making a killing this year.

David Tepper's firm was up about 25% through Friday, partly from a bet Europe will avoid a meltdown. Steve Mandel's firm gained nearly as much from soaring consumer and technology stocks. Pine River Capital Management rose 30% thanks in part to subprime mortgages, as did Josh Birnbaum's Tilden Park. And the Barnegat Fund has climbed over 39% with a debt strategy that the manager concedes isn't for the faint of heart.

The big gains, as reported by fund investors and people familiar with the firms, come as most hedge funds struggle for the fourth year a row, the longest period of underperformance since 1995 to 1998. Hedge funds on average gained 4.7% through September, according to industry tracker HFR, while stock-trading funds were up on average 5.5%. By comparison, the Standard & Poor's 500 index scored gains of 14%, including dividends, through Friday.

Many hedge funds have kept some money out of the market, concerned that "potential disaster scenarios" for the global economy "still lurk," says Greg Brousseau, founder of Central Park Group, which invests in hedge funds. This reticence hurt returns when the market rallied.

Driving the impressive gains at some of the year's big winners are a few distinctive—if sometimes risky—strategies.

Mr. Tepper's nearly $15 billion Appaloosa Management LP, based in Short Hills, N.J., is known for an expertise in distressed debt, and racked up over $7 billion in 2009 with bullish picks. This year, Mr. Tepper has scored approximately $3 billion of gains trading in and out of various stock, bond and stock-futures positions, according to an investor.

The firm began the year with a bullish stance, but sold positions when Greek elections raised questions about the future of the euro. Appaloosa bought again in late July after European Central Bank President Mario Draghi promised to "preserve the euro."

Technology and airline stocks, along with European company shares, also have helped Mr. Tepper's firm. According to the investor, Appaloosa remains bullish on global markets but wary of whether the Continent can keep its footing.

Mr. Mandel runs Lone Pine Capital LLC, of Greenwich, Conn., where he has made his mark betting on consumer-related companies. Since 2008, rivals have spent more time studying—and trading on—macroeconomic trends. But Mr. Mandel has stuck with traditional stock picking, according to an investor. This year, he's benefited from holdings of Apple Inc., AAPL up 51% in 2012; Gap Inc., up 91%; and Priceline.com, which has climbed 22%.

Some of this year's largest gains are coming from investors who bet on a housing recovery. Pine River was one of the first to make a huge wager on subprime mortgages, a trade placed about a year ago.

"It felt very lonely at the time, like we were the only ones doing it," recalls Colin Teichholtz a senior portfolio manager at the firm, which manages a total of $10.3 billion. Pine River continues to invest in subprime mortgages.

Tilden Park Capital Management LP is a New York hedge-fund started in 2008 by Mr. Birnbaum, former co-head of trading in the structured products arm of Goldman Sachs Group Inc. He was among those at the firm to become bearish on housing in early 2007, in time to place winning trades ahead of the housing collapse.

In a twist, Mr. Birnbaum turned optimistic on housing early this year, zeroing in on residential markets likely to recover markedly, according to people familiar with the firm. Tilden bought bonds backed by distressed home loans that stood to rise in a recovery and, in some cases, even a dip.

The firm, which managed about $1.1 billion through September, also was one of a handful that profited by taking the other side of J.P. Morgan Chase & Co.'s ill-fated "London whale" trades, which cost the bank more than $6 billion earlier this year.

London-based CQS LLP is also up, gaining 27.3% in its flagship fund through September, according to a person familiar with the $11.8 billion firm.

Bob Treue, founder of Hoboken, N.J.-based Barnegat Fund, is scoring gains trading Italian debt and other investments. His "relative value" strategy has capitalized on investors dumping holdings in recent times of panic.

Barnegat, which manages $617 million, uses heavy dollops of borrowed money, or leverage, in hopes of boosting returns—a similar approach to that used by Long-Term Capital Management, a hedge fund that famously collapsed in 1998, though Mr. Treue holds onto cash to prepare for any market downturn.

Mr. Treue is honest about his strategy's potential downside, which is one reason he hasn't seen a rush of investors to his fund. He recently sent a letter to potential investors listing 11 reasons not to invest with Barnegat, including the fact that it only has six employees. Mr. Treue says "99% of investors pass" after they read his warning.
Mr. Treue is a true trooper, no pun intended. He's one of the few who is not only outperforming but being 100% honest with potential investors about the downside risk of investing in his fund (watch interview below).

While there are exceptional hedge funds, most have lost the magic and are struggling to survive. What strikes me is how so many hedge funds have clamped down on risk worried about Europe, China, the US fiscal cliff, and whatever else the rest of the herd is looking at. On Wall Street, selling fear is good for business.

I remain bullish and view this latest pullback as another  buying opportunity. I'm particularly bullish on US coal stocks right now, adding to positions as people fret over tech results and what will happen with Europe and the US fiscal cliff. No matter who wins the elections, I remain bullish on coal companies.

But I'm not a big, swinging hedge fund manager charging clients 2 & 20 for beta or sub-beta performance. I'm just a blogger who calls it like he sees it. Most hedgies are overpaid asset gatherers who couldn't manage their way out of a paper bag. Same with private equity managers who are back at their old game of loading companies up with debt. They too are large asset gatherers delivering paltry returns.

Nonetheless, pension funds remain undeterred, increasing their hedge fund allocation despite the recent poor performance. This is good news for Igor, Yuri and Tatiana over at MCM Capital Management, hard at work preparing for the First Russian Hedge Funds Forum taking place in early December. You can be sure a lots of institutional investors horny for hedge funds will be attending that event looking for "Russian alpha."

All kidding aside, when will institutional investors and politicians finally get their collective heads out of their asses when it comes to hedge funds and private equity? As one NYT reporter laments, if primary-care doctors were taxed like hedge fund and private equity managers, there wouldn't be such an acute shortage of primary-care physicians in the United States.

As far as 'hedge fund homers', here are some of my favorites for 2012:
  • Reuters reports that Blackstone is preparing to launch a multibillion-dollar fund that will buy stakes in hedge fund managers in the secondary market, as traditional buyers such as banks pull back amid disappointing fund performance and regulation. Smart money is seeding hungry and talented alpha managers!
  • Forbes reports that billionaire hedge fund manager John Paulson has announced a pledge of $100 million to the Central Park Conservancy. When the pledge is fulfilled, the donation will be the biggest gift ever made to a public park. The gift will also be the largest made by Paulson in his second career as a philanthropist (blowhards like Donald Trump should take note).
And my favorite hedge fund homer of the year:
  • Reuters reports that Tom Steyer the billionaire founder of Farallon Capital, one of the world's biggest and best hedge funds, told investors on Monday that he plans to step down by year's end and become increasingly involved in philanthropy and politics.
Very smart man, he sees a future beyond hedge funds and knows the meaning of enough. I can assure you he won't be attending that Russian hedge fund conference or any other bogus hedge fund conference for the rest of his life (not that he ever went to these silly conferences).

Below, leave you with a long clip from the Economist Buttonwood Gathering 2012, featuring hedge fund managers Hugh Hendry and David Einhorn. While Tyler Turden and the rest of the turds over at Zero Edge couldn't stop praising Mr. Hendry and Mr. Einhorn for their "deep insights," I was hardly impressed (like David Einhorn but he's clueless on QE and Hendry comes off as a smug, arrogant gold shill who's full of it when he proclaims he's an agnostic existentialist).

Second, embedded a Bloomberg interview with Julian Robertson, founder and chief executive officer of Tiger Management LLC, talking about the hedge-fund industry, investment strategy and the outlook for the U.S. presidential election. Robertson, speaking with Tom Keene and Sara Eisen on Bloomberg Television's "Surveillance,"says hedge funds are 'scared'.

Third, embedded an interview with Bob Treue, founder and portfolio manager at Barnegat Fund Management, talking about the performance of his hedge fund, fixed-income arbitrage and investment strategy.  He speaks with Erik Schatzker and Sara Eisen on Bloomberg Television’s “Market Makers.”

Finally, Michael Platt, founder of hedge fund BlueCrest Capital Management LLP, talks about the sovereign debt market, investment strategy and global economic challenges. Platt speaks with Stephanie Ruhle on Bloomberg Television's "Market Makers."