Hedge funds are beginning to recover from the huge losses they suffered last year, as May turned into one of the best performing months in history.
On average, hedge funds climbed 5.23% last month, leaving them up 9.43% this year, according to an index of monthly returns compiled by Hedge Fund Research Inc.
Funds including Moore Capital Management Inc., Paulson Investment Co. Inc., SAC Capital Advisors Lp. and the Tudor Investment Corp. scored big gains across sectors using nearly all strategies as confidence slowly crept back into the equity and debt markets.
“May has been a remarkably strong month as it relates to hedge fund performance across the board,” said Andrea Gentilini, director of prime services for Barclays Capital. “Even the strategies that have been under severe stress over the course of the last two years have continued to post strong performance.”
Activist investor: A 10 June 2008 photo of Carl Icahn, billionaire investor and chairman of Icahn Enterprises, greeting guests after speaking at the New York Financial Writers Association dinner in New York, US. Jeremy Bales / Bloomberg
One of the most striking turnarounds has been from the Citadel Investment Group Llc., the Chicago-based firm run by the 40-year-old billionaire Kenneth C. Griffin. The firm’s flagship Kensington Global Strategies Fund was up 20.37% in the first five months of this year after plummeting 54.49% last year, according to performance numbers sent to investors.
Griffin is known for his talents in convertible arbitrage trading, which involves buying securities that convert into a company’s common stock while shorting, or betting against, the shares of the same company. That strategy, which brought Griffin’s investors immense financial pain last year, has gained 19.48% this year, according to the Credit Suisse/Tremont Hedge Fund Index.
Carl C. Icahn, the activist investor, has also experienced a reversal of fortune. After being down 37% last year and being forced to inject $500 million (Rs2,380 crore) of his personal money into his fund, Icahn, who manages $5.5 billion, has gained 16% this year, according to investors.
Paulson & Co., the $28 billion fund run by John A. Paulson, has continued to outperform the overall markets with big bets on gold companies and distressed debt. Paulson gained 8.75% through May in its flagship fund after an impressive 24.11% profit last year.
SAC Capital Advisors, the $7 billion fund run by Steven A. Cohen, is up 13.93% through May after dropping 18.53% in 2008.
Moore Capital, run by Louis M. Bacon, which lost a modest 4.7% last year, has gained 6.3% this year, and Renaissance Technologies, the giant black-box trading firm run by the former mathematics professor James H. Simons, has gained 2.63% through May, according to results.
Black-box firms use computer models to predict the market.
“After historical lows in 2008, risk appetite has quickly returned over the last eight weeks, suggesting that hedge fund investors are again looking past month-to-month volatility and focusing on the longer-term performance merits of the industry,” said Kenneth J. Heinz, president of Hedge Fund Research.
While most investors in hedge funds are pleased with the performance this year, many are still cautious about putting new money in risky strategies.
Hedge funds are expected to end the year with about $1.3 trillion in client assets under management, down from a peak of $2.5 trillion last summer, according to a recent study from Barclays Capital.
Several high-profile hedge funds, including Pequot Capital Management Inc. and Raptor Global Fund, have decided to liquidate or close their doors this year.
Most fund managers also remain bearish on the overall stock market, with a majority of funds positioned for sharp swings in both directions.
Hedge funds are also expecting a wave of new regulation from Washington, including an increase in taxes and requirements to disclose more information about their holdings and performance.
Officials in the Cayman Islands, home to more than 7,000 hedge funds, are working on new disclosure rules under pressure from world leaders, who call the islands an unregulated tax haven.
©2009/THE NEW YORK TIMES