Friday, October 7, 2011

Shrewd Hedge Funds Profit in September?

While the Caisse is not immune to market turbulence, Reuters reports that shrewd hedge funds profit in turbulent September:

A select band of shrewd hedge fund managers have avoided September's market pitfalls to post healthy profits, even as Europe's deepening debt crisis leaves much of the $2 trillion industry nursing painful losses.

Bearish macro bets such as owning U.S. and European government bonds, as well as being short equities, commodities and the euro, have helped funds navigate a crisis that has seen fears of a global recession and a banking crisis grow.

Brevan Howard's $25 billion Master fund, one of the world's biggest hedge funds, gained 1.5 percent last month to September 23, said two sources who had seen data on the fund's performance. This takes profits this year to 12.3 percent.

And GLG, part of Man Group, saw its $2 billion Atlas Macro fund, which is managed by Driss Ben-Brahim and Jamil Baz, gain an estimated 6 percent in September, said a person close to the company.

In contrast, the average hedge fund lost 3 percent last month, according to Hedge Fund Research's HFRX index, taking year-to-date losses to 8.4 percent. The third quarter was the worst for three years.

Equity funds were hard hit, particularly those focusing on stocks' fundamental value, with MSCI's World index of stocks falling a further 8.8 percent during the month.

A number of industry insiders have pointed to markets being preoccupied with economic worries, rather than company fundamentals.

"This is not 2008, but perhaps one similarity with 2008 is that market's focus is on macro, and no-one is really focusing on the micro," said Frank Frecentese, global head of hedge fund investments at Citi Private Bank.


Global macro funds -- made famous by the likes of George Soros -- have tended to be more bearish than equity managers and have benefited from falling bond yields in countries such as the United States, Germany and the UK.

On Thursday the Bank of England announced a further 75 billion pound stimulus, pushing yields on longer-dated debt to record lows.

Stenham Asset Management said its Trading fund, which invests in macro hedge funds, gained an estimated 0.8 percent in September, taking third-quarter gains to 3.4 percent.

Meanwhile, a smattering of equity managers were able to profit, even as markets fell.

Marshall Wace's $1 billion Eureka fund, managed by co-founder Paul Marshall, gained 1.5 percent in September, taking gains this year to 5.8 percent, said a source familiar with the matter.

And its Global Opportunities fund, which is run by Fehim Sever and which focuses on emerging markets, rose 6.5 percent last month, lifting this year's profits to 23.8 percent.

Among credit funds, CQS, one of Europe's biggest hedge fund managers, saw its Credit Long-Short fund, which is managed by Simon Finch, gain 1.7 percent in September, taking year-to-date gains to 7.9 percent.

This was helped by active trading of both long and short positions, according to a source familiar with the matter.

And while GLG's Emerging Markets fund has suffered this year, its Emerging Credit Opportunities portfolio gained 1 percent last month.

Go back to what I wrote a few days ago in my comment on pension ignorance being bliss:

...elite hedge funds are having a field day trading all risk assets. The best of them thrive in these volatile markets but the majority of hedge funds are getting clobbered along with other institutional investors, suffering their worst quarter since 2008, down 5% in Q3. This hardly surprises me as most hedge funds are selling beta as alpha and are full of crap. Many have become large asset gatherers with an army of salespeople who continuously "schmooze" with clients. It's a joke and I can say the same thing of many long-only funds that have been performing even worse but still manage to garner assets because they pay "incentives" to brokers and pension consultants. When are pensions going to finally wake up and start seeding performance driven emerging managers, just like CalPERS recently did in Canada?

By the way, if I sound "pissed off" in that comment it's because I have every right to be. One day I will publicly crucify the unscrupulous slimy weasels who played with my life and fired me after I warned them about the looming credit crisis and the stupid risks they took with pension monies. They screwed me and and many other good people and they knew I would never be able to land a good job with benefits again after blowing the whistle on them. One day the entire truth will be published on how a handful of pension pricks got away with murder and how their negligence and gross incompetence were covered up by board of directors, government supervisors and auditors. One day, I promise, but not yet (will also expose other scandals at Canadian public pension funds).

Back to the topic on how some hedge funds are profiting from the volatility and down markets. Sam Jones of the FT reports, Hedge fund bears reap billions:

For most hedge fund managers, being right is not enough. Being right three months before everybody else is what counts.

Twelve weeks ago, a handful of managers whose business consists of trading the sinews of the global economy – interest rates, bonds and currencies – wagered big that markets were teetering on the edge of another vicious downward spiral.

To do so was cheap – back in July the price of gold was rising and the S&P 500 was touching its post-Lehman highs.

Bearish positions in US rate derivatives and Treasury bonds could be constructed with a payoff 10 or even 15 times the risk taken.

As markets collapsed in August and whipsawed through September, such bets paid off. In recent weeks, bears have made billions.

As London’s Brevan Howard noted with typical brevity but little modesty in a letter to investors last month: “In August ... markets reacted and caught up with our macro views.”

For Brevan, that catch-up has been worth more than $2bn. The firm’s main fund, which manages investor assets of about $24bn, rose 6 per cent in August alone. Since the end of June, the fund has risen 9 per cent.

Such returns are all the more impressive considering the track record for the average hedge fund over the same period. The Hedge Fund Research HFRX index, which tracks performance of a basket of top hedge funds, has dropped 6 per cent in the past two months.

Hedge fund managers such as Paulson & Co, Appaloosa Management and Highbridge have all been wrong-footed by portfolios they have constructed based on bottom-up analysis of corporate fundamentals.

Brevan – a discreet outfit founded by a group of Credit Suisse traders nine years ago and run behind frosted glass in offices on Baker Street and in Geneva – is far from being alone in big funds that have done well.

“There are some outstanding performance figures from August and September and the recent market turmoil,” says Omar Kodmani, president of the Permal Group, which has about $21bn invested with hedge fund managers.

“Many of the mainstream macro managers have a fundamentally negative outlook. The current market is discounting the global economy falling apart in 2012,” he points out.

The $2bn Atlas Macro fund, run by ex-Goldman trading star Driss Ben-Brahim and ex-Pimco money manager Jamil Baz at GLG Partners rose 8 per cent in August, according to an investor in the fund. The fund rose another 8 per cent in September.

“Jamil and Driss have been extremely bearish on growth and the global economic outlook for some time and now it’s paying off,” said one GLG insider.

Paul Tudor Jones’s $7bn Tudor BVI fund rose 3.2 per cent over the month.

The $9bn Caxton Associates, one of the most successful hedge funds in the industry’s history, has seen its flagship $5bn fund rise 6 per cent since August, according to an investor.

“Markets are now recognising anaemic growth prospects and facing up to the systemic risks in the European bank system,” says Andrew Law, incoming chief executive of Caxton.

The post-Lehman rally markets saw in 2009 was, Mr Law says, an aberration: “It was a liquidity fuelled response to a very steep drop in GDP growth in 2008.”

For Mr Law, the market’s current growth outlook is “more realistic and also more pessimistic”.

“It’s difficult to see where the growth is going to come from. That applies to the US, to Europe and the UK,” he notes. The US, for example, faces “an enormous fiscal drag” beginning in 2013 when Bush era tax cuts expire.

Bearish managers nevertheless have to be careful. For most macro funds – Caxton included – tactical positioning still moderates their longer-term outlook.

Brevan Howard, for example, has from time to time peppered its long US bond positions with long positions in peripheral European debt.

The firm’s August letter to investors noted that “during July some small long exposures in Portuguese, Irish and Greek government bonds were established. Profits in the majority of these positions were subsequently taken.”

As eurozone leaders face up to the immensity of problems for the EU banking system, many bearish managers are now again laying on such bullish trades to benefit from any potential relief rallies – or mispricings caused by overselling.

Insiders say Brevan is still looking for opportunities to go long European peripheral sovereign bonds. For fear of relief rallies, it has operated all year under a policy of deliberately not going short.

“A rally could be very large,” Caxton’s Mr Law notes.

Bearish positions that paid off in August – long holdings of US Treasuries and German Bunds – would certainly be hit hard by a resolution to Europe’s current systemic crisis if it came.

“Current market activity is discounting the global economy falling apart in 2012,” notes Mr Kodmani, “but our view is less negative.”

Regardless of the medium term outlook – which hinges on the European systemic crisis – the factor for longer term prospects many bears are now looking at is China, which still divides opinion. Some have already bet – and won – based on the prospects of a harder than expected slowdown in the country.

Hugh Hendry, the founder of Eclectica Asset Management, has seen his Eclectica Credit fund – which has been designed specifically to profit from a China slowdown – rise 38.6 per cent so far this year.

A hard landing for China could be a disaster for the world economy. A soft landing might allow the bulls to get the upper hand once more.

You might be reading the above and thinking what makes these hedge funds so great? Big deal, can't anyone make bets against stocks and credit and profit from the downturn? Can't pension fund managers produce the same returns inside a pension fund?

The answer is yes, a few can, but the majority can't. Maybe not as good returns as these elite hedge funds -- if they were that good they'd leave their jobs at a pension fund, raise assets and collect 2 & 20 in fees -- but good enough.

I say this because while most pension funds are having a tough time navigating through this market turbulence, some are doing just fine. I received and email on Thursday morning from a senior Canadian pension fund manager telling me they're going to "generate notably positive returns this year" and spoke to another one in the afternoon who told me he's still in "risk off" mode and he's "glad he played it close to home over the past six months."

My conversation with the senior pension fund manager in the afternoon was interesting (it always is with him). I told him that these markets are volatile and while I was about to go short in my personal portfolio late yesterday (still 100% cash), I realized that we might get a positive surprise in the US jobs report on Friday morning. He agreed and told me that since the last few jobs figures came in below expectations, economists slashed their estimates and this time payrolls might come in above expectations.

I then gave him examples on how some stocks and sectors I trade got slaughtered in Q3 and rallied sharply in the last few days (for example, check out the recent price action on Trina Solar after getting clobbered in Q3 as many solars did). I asked him if it's time go full scale "risk on" mode and he told me "NO!". He thinks these markets are range bound and he told me while stocks could rally a bit more, "it's much wiser to short bear market rallies," picking your spots carefully, than get greedy and keep shorting as prices drop. "The problem with shorting when prices keep dropping is that some 'feel good' person like Bernanke, Merkel or Trichet pops up and talks up the market and you see the Dow rallying 300 or 400 points in the last 30 minutes of trading." He's absolutely right and he knows he's stuff, invests with the best hedge funds in the world and knows how to leverage those relationships to the benefit of his group and pension fund.

All this to say that individuals and many pension funds can learn a lot from these "shrewd" hedge funds. Don't try to be cute in these markets. Cut your losses, take your profits, always have some powder at hand, be nimble and patient. And don't forget, in these markets, macro matters a lot more than micro, so don't lose yourself in fundamental analysis of individual companies and don't fall in love with anything, including "shrewd" hedge funds. If you do, you'll get slaughtered.

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