Friday, January 4, 2013

The Most Successful Hedge Funds of 2012?

Lucas Kawa of Business Insider reports, The 100 Most Successful Hedge Funds of 2012:
The February 2013 edition of Bloomberg Markets Magazine features its ranking of the top 100 large hedge fund managers in the world.

Unlike last year when the most successful hedge funds were a variety of strategies — long/short, macro etc. — this year's success stories mostly come from the world of mortgage bonds.

This strategy provided an average return of 20.2 percent in 2012, far outpacing the industry average of 1.3 percent.

The tiny average return was also far worse than the performance of the S&P 500, which provided a double-digit return in 2012. Bloomberg reports 635 hedge funds closed due to these poor returns through September.

The hedge fund managers listed here, though, are far from closing up shop — some of them even manage multiple successful funds. In 2012, they dominated the market with returns ranging from 9 to 37.8 percent.
You can go through the entire list of the top 100 by clicking here. The number one fund was Metacapital Management, a mortgage-backed arbitrage fund run by Deepak Narula. The fund returned an astounding 37.8% in 2012 after an impressive 23.6% gain in 2011. Not bad for a mortgage-backed "arbitrage" fund.

Narula is obviously a smart guy. He's an adjunct professor at Columbia's Business School. Prior to founding Metacapital, he worked in the Fixed Income Department at Lehman Brothers from 1989 to 2000. At Lehman, he was a Managing Director and head of two mortgage-backed securities trading desks (mortgage pass-throughs and mortgage derivatives).

While I don't doubt Narula's qualifications, I warn institutional investors who are sticking with hedge funds despite another bad year, take all these silly articles touting the top hedge funds in any given year with a grain of salt.

Importantly, if you chase performance, you're going to get your ass handed to you. I don't care how smart any hedge fund manager is, always ask tough questions as assets under management mushroom and pay attention to the macro factors that can impact performance.

For example, while the hunt for yield has revived structured credit funds, it's important to understand the macro environment that enabled these funds to post such outstanding returns. As I wrote a couple of days ago, it may be not be buh bye bonds over the long-run, but you can have an important backup in yields over the next 12 months as the US labor market continues to improve and inflation expectations climb.

On Thursday, the release of Fed minutes showed that Federal Reserve officials are increasingly concerned about the potential risks of  asset purchases, prompting some in the market to position for the possibility of an earlier-than-expected unwinding of ultra-loose monetary policy. This sent 10-year US Treasury yields to an eight-month high of 1.94%.

While the Fed is not going to curb its asset purchases anytime soon, it is preparing markets for the eventual and that can have a huge impact on all those hedge funds that won big on subprime mortgages last year. They may have another stellar year but the risks are mounting and I would be very careful investing in this space as well as structured credit funds. Investors need to understand the "beta" in many hedge fund strategies. 


Below, the February issue of Bloomberg Markets magazine contains Bloomberg's annual rankings of the world's richest hedge funds. Bloomberg looks at the top five.

Also Fabio Savoldelli, finance professor at Columbia University, talks about global hedge fund performance and outlook. He speaks with Tom Keene and Scarlet Fu on Bloomberg Television's "Surveillance." Bloomberg View columnist William Cohan also speaks.

Finally, Bloomberg's Deirdre Bolton reports that hedge fund manager Steve Cohen's SAC Capital International tops Bloomberg Markets magazine's list of the most-profitable funds. She speaks on Bloomberg Television's "In The Loop."

Interestingly, the perfect hedge fund predator earned the most money last year -- a whopping $790 million --  not because of its performance, which was decent, but because SAC Capital charges the highest fees on Wall Street. Tatiana over at MCM Capital Management is taking notes.