Some of the biggest hedge-fund firms have slumped since September, sideswiped by falling stock and bond markets and a legal decision that sent Fannie Mae and Freddie Mac securities plunging.
Billionaire John Paulson’s namesake firm had some of the biggest declines last month, losing as much as 11 percent in one of its funds. Owl Creek Asset Management LP posted a 3.4 percent decline in the first three days of October driven largely by its Fannie Mae and Freddie Mac stakes, and is down 7.5 percent this year. Claren Road Asset Management LLC lost 5 percent in the first week of October because of its investments in the two U.S.-owned mortgage companies, wiping out gains for 2014.
Hedge funds, which aim to make money in rising and falling markets, returned 2.3 percent this year through September after falling 0.2 percent last month, according to the Bloomberg Global Aggregate Hedge Fund Index. Unless performance improves, the $2.8 trillion industry will be headed for its sixth year of trailing the Standard & Poor’s 500 Index, which was up 6.7 percent. Returns are also lagging behind U.S. government debt, which generated 3.7 percent for the first nine months of 2014.
“Most funds pursuing a strategy correlated with the broader markets were going to be subject to the ebbs and flows,” said Jay Rogers, president of Irvine, California-based Alpha Strategies Investment Consulting Inc., which advises hedge-fund clients and managers.
Corporate bond and stock markets dropped in September as concern grew that global economic growth was slowing. An index of high-risk, high-yield bonds fell last month by the most since June 2013. The S&P 500 had its biggest decline since April Thursday after European Central Bank President Mario Draghi said there are signs the recovery is losing momentum.
After peaking on Sept. 18, the S&P 500 has slid 4.1 percent, and a measure of volatility has soared 56 percent, helping to send several firms that were either flat for the year or that had gains into the red.
Paulson & Co., the $22 billion New York-based firm, was ahead in most of his strategies for the first half of this year.
In July, his hedge funds made almost $1 billion on his investment in OneWest Bank. In August, the funds posted mixed returns as two proposed mergers unraveled, hurting the stocks of Sprint Corp. and T-Mobile US Inc.
Paulson’s losses continued last month in its event-driven funds. Advantage, which makes bets on companies undergoing corporate change, such as spinoffs and bankruptcies, slumped 8 percent last month, bringing this year’s loss to 13 percent, according to two people familiar with the matter, who asked not to be identified because the information is private. The Advantage Plus fund, a leveraged version of the strategy, tumbled 11 percent in September and 14 percent for 2014, the people said.
The firm’s credit, merger and recovery funds also lost money last month. Its merger and credit strategies are still up this year and an unrestricted share class of the Advantage funds that can buy new issues bucked the rest of the funds in September. That was mainly because of an investment in Alibaba Group Holding Ltd., the e-commerce group that completed a record initial public offering last month. The unrestricted shares of Advantage climbed 8.5 percent in September and 2.5 percent this year and those of Advantage Plus surged 14 percent in September and 9.6 percent in 2014, said the person.
Other managers that experienced losses during the month include Greenlight Capital Inc., the $10 billion investment firm run by billionaire David Einhorn, which lost 1.3 percent in its main fund in September and gained 2.6 percent in 2014. Passport Capital LLC, the $4.1 billion firm managed by John Burbank, fell 0.7 percent in its long-short equity Global Strategy, trimming yearly gains to 1.2 percent.
Jamie Dinan’s $25 billion York Capital Management LP posted a 2 percent loss last month through Sept. 25 in its York Credit Opportunities Unit Trust Ltd., according to a person familiar with the matter, who asked not to be identified because the information is private. The decline reduced gains this year to 9.7 percent.
CQS U.K. LLP, the $14 billion firm founded by Michael Hintze, fell 1 percent in September in its Directional Opportunities Fund, driven by losses in structured credit, according to a performance update, a copy of which was obtained by Bloomberg News. The drop leaves the fund up 3 percent this year. It’s posted a 19 percent annualized return since inception in 2005.
Some hedge funds bucked last month’s declines. Ken Griffin’s Citadel LLC rose 4.4 percent in its main Kensington and Wellington funds, bringing 2014 returns to 15 percent. Boaz Weinstein’s Saba Capital Management LP climbed 1 percent in September in its Saba Capital Offshore fund, paring declines this year to 4.1 percent, according to a document viewed by Bloomberg News.
Macro funds, which can bet on stocks, bonds, commodities and currencies, were among the best-performing strategies in September with a gain of 1.1 percent, bringing returns this year to 2.1 percent, according to data compiled by Bloomberg. Long- short equity funds fell 0.1 percent in September and rose 2.3 percent year-to-date.
Owl Creek, based in New York with $3.9 billion and run by Jeffrey Altman, was one of last year’s best-performing hedge-fund firms, along with Paulson & Co. The firms, along with other hedge funds such as Perry Capital LLC, had invested in Fannie Mae and Freddie Mac speculating Congress or the courts would restore value to the securities. Preferred shares and equity in the two mortgage companies have tumbled since Sept. 30, when U.S. District Judge Royce Lamberth threw out a lawsuit that would have forced the government to share the companies’ profits with shareholders.
Spokesmen for the firms declined to comment on the returns.
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