Thursday, July 10, 2014

2014’s Hedge Fund Winners and Losers?

Madison Marriage of the Financial Times reports, 2014’s hedge fund winners and losers:
Bill Ackman's Pershing Square has topped a list of the year’s best-performing hedge funds at a time when event-driven funds thrive while their trend-following rivals suffer.

Mr Ackman’s $5.8bn activist hedge fund Pershing Square International has returned 23.3 per cent to the end of June, according to data from HSBC’s Alternative Investment.

His fund is one of several event-driven strategies, which make bets around corporate events such as mergers and acquisitions, to feature in the top 20 best-performing funds of the year.

Global macro funds, by contrast, which trade instruments including currencies, interest rates and foreign exchange based on changes in economic policy, have dominated HSBC’s list of the worst-performing funds.

Event-driven funds have benefited from a rise in mergers and acquisitions and buyback activity, as well as low volatility and falling yields, according to Alex Allen, senior portfolio manager at Sciens Alternative Investments.

These conditions have led other event-driven strategies, including the Tyrus Capital Opportunities fund, the Trishield Special Situations fund and Mudrick Distressed Opportunity fund, to register gains of 18.1 per cent, 15.3 per cent and 15 per cent respectively.

The wider hedge fund industry, by contrast, is up 1.6 per cent year to date, according to Hedge Fund Research, the data provider.

At the other end of the performance scale, three macro funds, including Mellon Capital’s $871m Offshore Alpha Access fund, the $851m Rubicon Global fund and the $417m Eagle Global fund, are the worst performers year to date.

The Mellon fund was down 21.7 per cent to the end of May, while Rubicon and Eagle are down 17.8 per cent and 17.4 per cent respectively. The average macro hedge fund has returned 0.7 per cent year to date, according to HFR.

Amy Bensted, head of hedge fund products at Preqin, the data provider, said: “There has been lots of pressure on [macro funds] as markets have been difficult to follow and lots of big funds have made losses. This is a continuation of a trend – [macro funds] have been at the bottom of our performance benchmarks and they have struggled to generate returns from any major themes in the last few years.”

Ms Bensted added, however, that the poor performance figures have not led to significant outflows for the larger macro managers as nervousness builds about the resilience of equity markets.

She said: “Macro has popped into second position in terms of the most searched for strategy as investors look for non-correlation to equity markets.”

Mr Allen added: “Absolute correlation between hedge fund strategies is on the rise and is high by historical standards. Where you have high correlations, it implies a lack of diversification. Macro is one of the areas you still get that diversification benefit.”
There is no doubt about it, as Rob Copeland of the Wall Street Journal reports, Returns From Activist Hedge Funds Are Causing a Stir:
Speaking up is paying off.

Activists are once again at the top of the hedge-fund heap, after a profitable stretch of clashes with companies around the world.

Activist managers gained 6.5% in the first half of the year, almost double the total for the average hedge fund, according to data to be released this week by research firm eVestment. Activist investing, in which managers buy stakes in companies and then agitate for changes in the form of buybacks, divestitures or management shakeups, was also the top-performing strategy among hedge funds in 2013.

The fund managers could earn millions for themselves—and billions for their investors—if the gains stick through the end of the year.

But with deal making near its historical peak, some investors and analysts wonder if the activist rally could start to sputter.

William Ackman, founder of Pershing Square Capital Management LP, is likely the biggest winner among the larger firms this year. His main fund posted a 25% gain in the first half, investor documents show, likely earning his firm fees estimated at nearly $1 billion so far in 2014.

Mr. Ackman has profited from his unusual backing of Valeant Pharmaceuticals International Inc.'s bid for Botox maker Allergan Inc., as well as a recent decline in the price of Herbalife Ltd., the nutritional-supplements maker he is betting against. Allergan traded at $116 a share before Pershing Square began rapidly building its stake in April. Shares closed Monday at $165.85, or 51% higher. Herbalife, which closed Monday at $66.18, is down 16% this year.

Mr. Ackman has long been known for his large, concentrated public bets. But this latest rise of shareholder activism, which was earlier known by less-flattering terms like corporate raiding, is creating new standouts.

Keith Meister spent most of his career as a little-known deputy of Carl Icahn before striking out on his own three years ago to start Corvex Management LP in New York. Since the start of last year, Corvex has more than tripled in size to manage more than $7 billion.

Its main fund is up nearly 11% this year, a person familiar with it said, helped by the resolution of Corvex's battle against CommonWealth REIT CWH +1.78% and the purchase of jeweler Zale Corp. by Signet Jewelers Ltd. SIG -1.75% , a large Corvex holding.

Despite the strong first half from activists, they still trailed the broader stock market: The S&P 500 rose 7.1% in the first half, including dividends.

Hedge funds as a whole gained about 3.1% in the first half, though most managers profess not to measure themselves against the broader stock market, because they aspire to do well in both rising and falling markets, and because they also invest in areas outside equities.

Bolstered by wealthy investors eager to profit from corporate changes, activist managers continue to engorge with cash—they attracted some $4 billion of new allocations in May alone, eVestment said.

"It's not just the money that's gone in, but the world is more supportive of what they are doing," said Justin Sheperd, chief investment officer at Chicago-based Aurora Investment Management LLC, which puts more than $9 billion into hedge funds. "It's a different environment today."

Activists also are increasingly busy. According to FactSet SharkWatch, there were 148 activist campaigns launched in the first half of this year, the most since the financial crisis.

The tide could yet turn if stock markets stumble. Many activists, as well as others who bet on company changes, lost money in the second half of 2011, when economic uncertainty put the brakes on mergers activity.

Mr. Sheperd said he was optimistic for the back half of the year, as long as interest rates remain low, encouraging mergers and acquisitions. However, he said if markets go "haywire," then activists could do the same.

There are some indications that the great swelling of many activist firms, which has given them broader heft to agitate for corporate changes, may be on the ebb. Jana Partners LLC, a New York activist firm that rose past $10 billion under management this year, closed its largest fund to new investment in the spring so it could better manage the growing size, according to investor communications.

Jana, which gained 8% in that fund in the first half, also is weighing shutting off fundraising at its other fund in the near future, a person familiar with the firm said.

Several investors cited Jana founder Barry Rosenstein's reported purchase this spring of the most expensive home in the U.S., a $147 million beachfront mansion in the Hamptons, as a reminder of past market peaks.

Mr. Ackman, whose Pershing Square manages more now than it ever has before, has actually seen more money leave than come in this year, documents show, as some investors take money off the table.

Investors have pulled more than $400 million from Pershing Square over the past six months, though that sum represents less than 3% of the firm's capital.

Other well-known activists also posted solid starts in 2014, as Daniel Loeb's $15 billion Third Point LLC and Trian Partners LP, part of the $9 billion firm co-founded by Nelson Peltz, each returned about 6%.

It also has been a long wait for one big-name hedge fund that has increasingly dabbled in activism in recent years.

Paul Singer's Elliott Management Corp. is sitting on defaulted Argentine bonds and related claims valued at as much as $2.5 billion, or 10% of the firm's total assets under management.

As Mr. Singer and Argentine officials tussle publicly over the repayment of the bonds, however, the New York-based firm's Elliott International Ltd. fund is lagging behind its peers. It is up just 4.1% in the first half of 2014, an investor update shows.
If you ask me, it's as good as it gets for activist funds. And while many macro funds are struggling, the goliath of macro funds is doing very well in 2014. Nathan Vardi of Forbes reports, Billionaire Hedge Fund Manager Ray Dalio Is Back, All Weather Fund Up 11%:
Billionaire hedge fund manager Ray Dalio is the king of the rich hedge fund industry. He runs the biggest hedge fund outfit in the world, Bridgewater Associates, a firm with $150 billion under management that Dalio founded in 1975. So far, Dalio’s having a pretty good 2014 following a challenging two-year stretch.

Dalio’s key All Weather Fund has returned 11.16% this year through June, according to an investment report reviewed by Forbes. The Standard & Poor’s 500 index returned 6.05% over the same time period. The All Weather fund is up 17.01% in the last 12 months.

Things are looking sunnier for Dalio. The good performance of All Weather is an important reversal for him and Bridgewater. With more than $70 billion in assets, the All Weather fund is built around a risk-parity strategy that Dalio has helped popularize. The strategy, which leverages up bond investments in an attempt to balance out portfolios, is supposed to generate good performance in just about any market environment. But last year All Weather was down by about 4% as the U.S. stock market soared by more than 30%. The All Weather Fund’s loss in 2013 hurt Dalio’s reputation as a guy who could consistently deliver steady returns for institutional investors, particularly pension funds.

Bridgewater’s big Pure Alpha hedge fund returned 7.77% in the first six months of the year. That not only beats the U.S. stock market, it bests the average hedge fund manager, who has only been able to return 3.2% this year through June, according to HFR. It has been a very tough year for most hedge fund managers, particularly macro managers, a category that broadly includes Dalio. Last year, Dalio’s main Pure Alpha fund only returned 5%. The year before, its returns were basically flat.

While a good year for All Weather is just about the best thing that could happen for Dalio’s business, he has suffered a different kind of setback this year. He has had to give up on his effort to build a new $750 million Bridgewater headquarters in Stamford, Ct., that included $115 million of state incentives such as tax credits. Local opposition killed the plan and for now Bridgewater remains headquartered in Wesport, Ct.
So far, 2014 is a great year for Bridgewater. Both the All Weather and Pure Alpha funds are performing extremely well which is why Ray Dalio is coming out to talk about the soul of a hedge fund machine.

While Bridgewater is leading its large global macro peers, Laurence Fletcher of the Wall Street Journal reports that other hard-hit funds are staging a nascent turnaround:
Global macro hedge funds are showing signs of life after weathering a difficult period.

These funds, which bet on movements in instruments as diverse as bonds, equities, currencies and commodities, are famous for large returns and big directional trades by the likes of billionaire George Soros. In recent years, the funds' returns have been hurt by the difficulty of predicting the moves of politicians and lawmakers.

The early signs this year weren't especially encouraging. Bets that the dollar would continue its rise against the yen and that U.S. Treasury yields would move higher—both trades that worked last year—proved wrong.

But in recent months, some funds have started to produce better numbers, helped by gains in equities in developed and emerging markets, as well as a recent rise in Treasury yields.

One of the year's top performers in the macro-fund sector is London-based Pharo Management (UK) LLP. Its $460 million Pharo Trading Fund, run by Guillaume Fonkenell, gained 19.9% in the first five months of the year. Its $4.1 billion Pharo Macro Fund was up 8%, according to the firm. It said June numbers weren't yet finalized.

London-based Omni Partners LLP, which manages about $650 million, saw its macro fund gain 1.6% in the first 13 days of June, taking gains this year to 4.4%, according to data from a large hedge-fund investor that was reviewed by The Wall Street Journal. Omni didn't respond to a request for comment.

Moore Capital's $3.6 billion Moore Macro Managers, run by Louis Bacon, rose 1.46% from June 1 to June 19, putting it up 2.57% for 2014, according to a spokeswoman for Moore. Moore's flagship Global Investment Fund, which is also run by Mr. Bacon and which had suffered losses through the end of May, was up 1.23% in the first 19 days of June, the spokeswoman said. It was still down 3.75% this year.

And while Tudor Group's $7.2 billion Tudor BVI Global Fund and Caxton Associates LP's $4.8 billion Global Investment fund are both still down this year, Tudor gained 1% from June 1 to June 13 and Caxton rose 1.5% from June 1 to June 16, according to the data from the large hedge-fund investor. Caxton and Tudor didn't respond to a phone call and an email seeking comment.

Early numbers from hedge-fund researcher HFR showed macro funds posted a marginal gain in June, on average. This would be the third consecutive month of gains for the strategy, which was up 0.7% in the first five months of the year. The average hedge fund is up just over 2% this year through early July, according to HFR, a research firm. In 2012 and 2013, while the average hedge fund posted solid single-digit returns, macro funds were in negative territory. And while macro funds beat the wider market in 2011, they were still down almost 5%, according to HFR.

While small, the gains this year are welcome after three consecutive calendar years of losses for macro traders from 2011 to 2013.

Roberto Botero, director of portfolio advisory at Sciens Alternative Investments, an investment firm that invests with hedge funds, said funds are finally seeing the benefits of changing their portfolios last year to position for the Federal Reserve's tapering of its bond-buying program and for emerging markets to have staged their early-year rebound.

"The turnaround in [macro funds'] portfolios has started to pay off," he said. "For some names, we're seeing a period of [better returns], but it's still very early days."

He said some funds are betting the U.S. dollar will gain against the Chinese yuan, and some are shorting the euro, or betting that it will fall, and investing in higher-yielding currencies of countries with strong commodity sectors.

Even one of the worst-performing hedge funds this year has made gains recently. London-based Rubicon Fund Management LLP's $850 million Global Fund gained 1.8% in the first 13 days of June, although it was down 17.7% this year, said a person who had seen the numbers. The fund returned more than 18% last year, the person said.

But some continue to struggle. Brevan Howard's $27 billion Master Fund lost 0.3% in June, said a person familiar with the matter. This takes its losses in the first half of the year to around 4.4%, raising the prospect of the first negative year in the fund's history.

A letter to investors for May—the firm's latest—reviewed by The Wall Street Journal said the fund would suffer losses on the short end of the bond yield curve in Europe if interest rates rose.

Brevan Howard declined to comment.

Some investors now think that the dwindling influence of the Federal Reserve as it cuts back its stimulus and the emergence of trends as major economies head in different directions could offer more lucrative trades for macro funds. Investors point to Thursday's robust U.S. nonfarm payrolls data as providing more direction for the dollar and bond yields.

"Now a lot of the political surprise has gone [from markets], there surely has got to be some fixed-income macro money to be made based around tapering," said Chris Jones, managing director at Bfinance, which advises investors on their hedge-fund allocations.

Anthony Lawler, who manages portfolios of hedge funds at GAM, an investment manager, said macro trading was tough, but currencies and bond markets could move in different directions as economies such as China and Brazil slow, while India, the U.S. and Japan grow.

"In traditional macro markets, we are seeing opportunities as a result of differing country growth and policy paths," he said. Macro traders are taking positions such as betting that the U.K. pound will rise, that the dollar will gain against the yen and euro, and buying European and Japanese stocks, he said.

But some investors remain skeptical.

Robert Duggan, managing director at fund of hedge funds investor Skybridge Capital, said his funds hadn't invested with macro managers for several years and his firm was "definitely" still negative on the strategy. "If there's a big 'risk-off' period they're not going to do well," he said.
As the Fed mulls its policy exit, everyone is getting hot and horny about global macro again. I think investors should tread carefully. There will be good months ahead but if deflation rears its ugly head, most of these global macro funds will get clobbered (as will most hedge funds leveraged on beta!).

Below, CNBC's Kate Kelly looks at how some of the biggest hedge fund managers have fared so far this year and what they're eyeing now.

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