Hedge funds, which are supposed to outperform stocks and bonds in up and down markets, have failed again.
Overall, hedge funds lost roughly 4 percent in 2011, marking the $1.7 trillion industry’s second-worst year on record, according to data to be released today by hedge fund tracker Hennessee Group.
By some accounts, however, last year was even worse than 2008, when the average fund lost 20 percent. That’s because, in addition to an overall negative return, the industry also failed to beat the broader markets.
These super-secretive traders generally pride themselves on being able to provide returns in any market.“If everybody was totally hedged, you should have a positive return, which you don’t,” said Campbell Harvey, Duke University finance professor.
At the very least, they boast of being able to outperform stocks — the same securities that make up the bulk of the industry’s assets.
In 2008, for instance, the industry boasted that while hedge funds fell an average of 20 percent during the financial meltdown, the Standard & Poor’s 500 index lost a whopping 40 percent.
Not in 2011.
Last year, the Dow Jones industrial average gained 5.5 percent, while the S&P was virtually flat. The Barclays Aggregate Bond index posted annual gains of about 8 percent.
Lee Ainslie’s Maverick Fund ended last year down 15 percent, while Glenn Dubin’s Highbridge Long-Short Equity fund lost roughly 12 percent, according to data obtained by The Post.
The biggest pounding last year was suffered by hedge fund superstar John Paulson, who rose to prominence in 2008 due to his bets against toxic mortgages.
Last year, Paulson suffered double-digit declines in several of his funds, and was on track to lose between 30 and 50 percent in his Paulson Advantage funds as of December, according to data obtained by The Post.
Charles Grandante, co-founder of Hennessee Group, said hedge funds were hurt by Europe’s debt crisis, seesawing markets and backfiring bets on gold and financial stocks.
“Globalization has caused the stock market to really change its complexion,” he said.
Indeed, some hedge funds played it too safe when stocks started slumping in August because of concerns over Europe’s debt crisis and a possible double-dip recession in the US.
After losing money from the summer swings, many hedge funds moved to cash and, as a result, never benefitted from the ride back up.
Of course, some funds also posted stellar 2011 returns, setting them up to be closely watched in 2012.
Jim Simon’s REIF fund returned a whopping 35 percent in 2011, while Ray Dalio’s All Weather fund returned 17 percent, sources said.
The part that gets me is that many hedge funds "moved to cash" after Q3. What the hell?!? Why are dumb institutions paying 2 & 20 to these bozos to sit on cash? Even worse, the Telegraph reports that Paulson trio share £12m payday amid euro woes:
The business, which is controlled by US hedge fund manager John Paulson, made a profit of £26.5m in the year to the end of March 2011, according to accounts filed at Companies House. The fund’s highest paid director – likely to be Paulson Ltd, the parent group – received nearly £15m.
The three London based directors – Nikolai Petchenikov, Harry St John Cooper and Mina Gerowin – are thought to have split the remaining £11.55m.
While the scale of the pay-outs are likely to spark further criticism of excess in the City, profits at Paulson Europe actually fell from £32m in 2011, while revenues were down 5.4pc to £36.9m.
Despite that performance, staff costs at the hedge fund rose sharply, up from £5.6m in 2010 to £8.4m. The pay-out handed the fund’s 11 staff average compensation of £760,000.
Profits last year are thought to have been generated in part by short positions on European banks – an investment strategy Mr Paulson said he had pushed in response to the sovereign debt crisis.
Mr Paulson is known to have made huge profits after he bet against British banks in the run up to Lehman Brothers’ collapse in September 2008 before reversing his position and betting on their recovery.
The success of those trades came after Mr Paulson’s bet on the collapse of the sub-prime mortgage industry in the US made him more than $3bn (£1.9bn).
Since then, however, times have got tougher for the US hedge fund boss. With the $2 trillion sector suffering its second worst year on record in 2011, Mr Paulson was one of the most high profile casualties.
His $3.4bn Advantage Plus fund lost 52pc in the year to December, according to industry experts, with his Advantage fund down 36pc.
Mr Paulson wrongly bet that the American economy would recover in 2011. He had big stakes in companies such as Bank of America and Hewlett Packard and a large exposure to gold.
Paulson called it an 'aberrational year'. Hopefully 2012 will be a better year for his fund but the truth is that a lot of these hedge fund "superstars" are one hit wonders. When I told investors to invest with Citadel after the 2008 carnage, it's because guys like Ken Griffin are a breed apart in the hedge fund world. They know how to recover fast and make money in all markets.
There are only a handful of other stellar hedge fund managers. George Soros, the best of the best, Julian Robertson of Tiger, Bruce Covner of Caxton, Izzy Englander of Millennium, Ray Dalio of Bridgewater, Alan Howard of Brevan Howard, Steve Cohen of SAC Capital, Thomas Steyer of Farallon Capital, and Paul Tudor Jones, to name a few. Also, I am not worried about Lee Ainslie’s Maverick Capital, they are long Chinese solars and American solars, which I'm betting will do well in 2012.
And, of course, Jim Simons of Renaissance Technologies (RenTech) which was once again among the funds that dominated in 2011. RenTech is already off to a flying start early in 2012, long Netflix, which is up almost 30% this week (click on image to enlarge):
But don't bother chasing Netflix higher, you'll likely get burned. Only experienced traders know how to play this game, and it isn't an easy one. But there are many other stocks in various sectors that have yet to take off. When they do, watch out, it will be spectacular. Yes my dear hedgies, don't worry about Europe or "paranormal" market activity, keep charging 2 & 20 for beta, I got a good feeling about 2012.
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