Firms see biggest one-month loss since Lehman went bust, as bets aimed at minimizing losses didn't. The question now: What will June bring?
John Paulson, Louis Bacon and Andreas Halvorsen navigated the global market turmoil of 2008 with little or no damage. They weren't as successful last month as the Dow Jones Industrial average had its worst May since 1940.
Hedge funds lost an average of 2.7 percent through May 27, according to the HFRX Global Hedge Fund Index, as the sovereign debt crisis in Europe triggered declines in stocks, the euro and commodities, and the gap in yields between U.S. short-term and long-term debt narrowed. It was the biggest decline since November 2008, when hedge funds lost 3 percent in the wake of Lehman Brothers Holdings Inc.'s bankruptcy two months earlier.
Almost every strategy lost money in May, according to Hedge Fund Research Inc. in Chicago, as the Dow index of 30 big stocks sank 7.6 percent including dividends amid speculation that Greece's debt problems would spread to nations such as Spain and Portugal. Some of the best-known funds saw their gains for this year erased.
“Attempting to manage risk in an environment where everything that could go wrong does go wrong seems like a fruitless endeavor,” said Brad Balter, who runs Balter Capital Management LLC, a Boston firm that invests in hedge funds for clients. “The only defense that seems to work in months like these is being in cash.”
Paulson's Advantage fund dropped 6.9 percent through May 21, dragging it to a year-to-date loss of 3.3 percent, according to investors with knowledge of the results, who asked not to be named because the information is private. Halvorsen's Viking Global fund fell 3.4 percent in the same span and 2.9 percent for the year. Bacon's Moore Global declined 7.7 percent as of May 20 and 4.8 percent in 2010, investors said.
Representatives of Paulson & Co., Viking Global Investors LP and Moore Capital Management LLC, the New York-based firms that oversee the funds, declined to comment. Paulson, Halvorsen and Bacon have among the best long-term returns in the industry, each with average gains of 20 percent or more since they started.
Paulson Advantage fund climbed 25 percent in 2008 while the S&P 500 slumped 37 percent including dividends, its largest setback since the Great Depression. Viking rose 0.1 percent that year and Moore Global slid 4.6 percent, offering investors the type of bear-market shelter they look for in hedge funds.
Many of the wagers that hedge funds put on to protect against falling markets didn't work, Balter said.
Their bets on falling stocks didn't make enough money to counter losses in shares the managers expected to climb. Commodities retreated 8.2 percent in May, as measured by the UBS Bloomberg CMCI Index. Traders who positioned themselves for the U.S. yield curve to steepen, a sign of expected economic growth, suffered losses when the difference between payouts on two-year and 10-year Treasury notes narrowed instead.
The spread shrank from 269 basis points at the end of April to 252 on May 28. A basis point is one-hundredth of a percent.
SAC Capital Advisors LLC, the hedge-fund firm run by Steven Cohen in Stamford, Connecticut, with about $12 billion under management, lost 2.9 percent last month through May 21 with its SAC Capital International fund, trimming this year's gain to about 4 percent, according to people familiar with the firm.
Citadel Investment Group LLC, the $12 billion hedge-fund firm run by Ken Griffin, lost about 2 percent with its biggest funds last month through May 21, said people familiar with the Chicago firm. The funds soared as much as 62 percent last year as markets rebounded after losing as much as 55 percent in 2008.
Brevan Howard Asset Management LLP in London, Europe's largest hedge-fund firm, lost 0.1 percent for the month through May 21 with its Brevan Howard Fund Ltd., leaving it with a decline of 0.3 percent this year, according to an investor.
Some funds made money last month.
Caxton Associates LLC, the New York-based firm founded by Bruce Kovner, rose 1 percent through May 21 with its largest fund as currency trades paid off, an investor said. The fund is up 4.5 percent for the year.
Autonomy Capital Research LLP, based in London, climbed 0.7 percent through May 21 and about 12.5 percent for the year, according to people with knowledge of the fund.
Robert Gibbins, manager for the $1.5 billion firm, said his trades were based on the forecast that global economies won't improve until currencies are better aligned, and in particular Chinese officials agree to let the yuan strengthen, he said.
“That people were looking for new highs on equities didn't make sense to us,” Gibbins said in a telephone interview. Before last month, the S&P 500 had soared 80 percent from its 12-year low in March 2009, including dividends.
Gibbins said his profitable trades included wagers that the S&P 500 would fall and that interest rates in a number of countries would slide.
BAM Capital LLC, a $300 million hedge-fund firm in New York that bets on price volatility, returned 7.7 percent last month through May 21 with its main BAM Opportunity Fund LP, bringing its gain for the year to 8.2 percent, according to an investor.
The VIX, an index measuring volatility, jumped about 45 percent last month.
Spokesmen for SAC, Citadel, Brevan Howard, Caxton and BAM Capital declined to comment.
The price swings in May haven't changed managers' views on whether global economies are rebounding or shrinking.
“Managers who are positive are still positive, and negative managers are still negative,” said Charles Krusen, head of Krusen Capital Management LLC, a New York-based firm that invests in hedge funds for clients.
