Industry rebounds in first half after grim 2008
Citadel, Jabre up more than 30% as convertible arbitrage recovers
By Alistair Barr, MarketWatch
Last Update: 7/8/2009 3:21:00 PM
SAN FRANCISCO (MarketWatch) - Hedge funds generated strong returns in the first
half of 2009 as the $1.3 trillion industry rebounded strongly from record losses
last year.
Funds run by Ken Griffin's Citadel Investment Group and Jabre Capital Partners,
headed by GLG Partners (GLG) co-founder Phillippe Jabre, were up more than 30% in
the first half as convertible arbitrage came roaring back.
Other big hedge fund firms including Paulson & Co., Brevan Howard, Moore Capital
Management, Viking Global and Tudor Investment generated solid gains after making
money or dodging most of the carnage last year.
Other firms weren't so lucky. Horseman Capital Management's main fund lost more
than 16% in the first half after a strong 2008. Ursus, a short selling fund run
by Jim Chanos' Kynikos Associates, lost more than 10% through June this year.
Trend-following funds including BlueTrend and Winton Futures also lost money.
An index of hedge funds run by consulting firm Hennessee Group LLC rose 0.64% in
June, leaving it up 11.74% in the first half of 2009, easily out-pacing equity
and bond market benchmarks.
Another index compiled by Absolute Return gained 0.43% last month, leaving it up
6.33% in the first half, according to estimates based on a third of managers
reporting.
The Standard & Poor's 500 index rose 0.02% in June and was up 1.78% in the first
half, while the Barclays Aggregate Bond Index gained 0.57% last month, leaving it
up 1.90% in the first half, Hennessee said.
"If you don't take into account what happened last year, hedge funds had a
fantastic first half," said Bradley Alford, head of Atlanta-based Alpha Capital
Management LLC. "A lot of this was reversion to the mean because managers lost so
much money last year. Things had gotten so out of whack that there had to be a
snap back."
Hedge funds use a wider range of strategies, such as short selling, to try to
make money no matter what's happening in broader markets. Other investors in the
industry expect gains to exceed benchmarks like the S&P 500 or the return on safe
assets such as U.S. Treasury bonds. For such performance, investors have been
willing to pay hefty fees of 2% of assets and 20% of annual profits.
However, last year's financial crisis crushed the industry as plunging stock and
bond prices, regulatory limits on short selling and massive investor redemptions
left hedge funds with record losses of 19% on average. That still beat slumping
equity markets, but it undermined the assumption that hedge funds make money in
any environment.
By beating the market in the first half of 2009, hedge funds got back to doing
one of the things their supposed to do.
"The industry did very well by and large," said Chris Jackson, president of SFG
Asset Advisors, which invests in hedge funds. "Many managers were up
substantially more than the indices. They're continuing to add value."
Managers focused on convertible arbitrage performed the best in the first half of
2009, returning more than 21%, according to Absolute Return. Short-biased hedge
funds performed the worse in the period, losing 5.2% on average, Hennessee
reported.
