“Paulson’s Advantage Fund, which owned Shire shares, was down nearly 11% for October through last Tuesday, bringing the $21 billion firm’s losses in that fund for the year to nearly 22%, according to data from Lyxor, the wealth-management arm of Société Générale SA…That was before Shire fell 30% on Wednesday in New York.”, Wall Street Journal
“I thought Paulson, the guy who saw the mortgage and financial crisis coming and shorted “everything” and made billions in 2008, was supposed to be infallible????”, Mike Perry, former Chairman and CEO, IndyMac Bank
Misery Widespread at Hedge Funds
Market Turmoil Inflicts Losses in Industry’s Worst Period Since 2011
By Juliet Chung
From left: John Paulson, Jana Partners’ Barry Rosenstein and Millennium Management’s Israel Englander are riding a turbulent market. Getty Images (Paulson); Reuters (Rosenstein); Bloomberg News (Englander)
This month’s turmoil in financial markets has been a “bloodbath” for hedge funds, inflicting large losses at an array of multibillion-dollar firms in the industry’s worst stretch since late 2011.
It isn’t unusual for one segment of the $2.8 trillion hedge-fund world to find itself caught in a downdraft. But in October, the pain has been widespread.
There were casualties among funds that make bets based on their fundamental analysis of companies, events like takeovers and broad economic trends. The losses came amid sharp volatility in stocks, bonds, currencies and commodities.
Top firms including Jana Partners LLC, Discovery Capital Management LLC and Paulson & Co. have posted losses ranging from 5% to 11% for the month, according to investors.
“It’s a bloodbath out there,” said Brad Alford of Alpha Capital Management, an Atlanta-based investment firm. He attributed some of the losses to funds crowding into the same stocks and rushing out at the same time. “There are some awful numbers.”
One hedge-fund manager told clients Monday that market activity reminded him of a “familiar plotline” from the “Jaws” movies. “An idyllic investment environment amid an improving economy…and then cue the music…dun-dun…dun-dun…dun-dun,” Paul Westhead, chief executive of $4 billion fund Rimrock Capital Management LLC, wrote in a letter to investors.
Some investors say that Thursday and Friday, when some of the stocks that were slammed earlier in the week rebounded, have helped funds, though many remain in the red.
The month has been marked by several popular trades turning sour. Shares of Fannie Mae and Freddie Mac were hammered after the market closed on Sept. 30 when a federal-court ruling went against investors contesting the U.S. government’s decision to take all the profits from the mortgage-finance giants rather than collect set dividend payments. The unexpected collapse of AbbVie Inc.’s $54 billion agreement to buy Shire PLC triggered a selloff of stocks involved in cross-border mergers.
Fresh concerns about economic strength in China and Europe also were big factors in the markets this month.
“The assumption underlying a lot of trades is a global growth story,” said Jane Buchan, chief executive officer of hedge-fund investor Pacific Alternative Asset Management Co., saying many U.S.-based funds had overlooked the weakness in Asia and Europe amid a domestic recovery.
Discovery, based in South Norwalk, Conn., was down about 10% for the month, according to an investor. Discovery’s performance is frequently volatile, and recent losses compound losses it took earlier in the year, when previously highflying Internet, social-media and biotechnology companies sold off.
Paulson’s Advantage Fund, which owned Shire shares, was down nearly 11% for October through last Tuesday, bringing the $21 billion firm’s losses in that fund for the year to nearly 22%, according to data from Lyxor, the wealth-management arm of Société Générale SA that invests client money in hedge funds. That was before Shire fell 30% on Wednesday in New York.
On an investor call Friday, founder John Paulson said he believed losses on Shire could be regained in the next few months.
Mr. Paulson also wrote to clients Friday saying the New York-based fund, which bets on mergers, has the right wagers for the current environment and will seek to continue to play consolidation in the oil, telecommunications, health-care and cable industries.
Jana, the $11 billion activist firm, lost about 5% in its flagship fund for October through Monday, hurt in part by its investments in the energy sector, according to people familiar with the matter. Jana, which typically pushes for changes at the companies it targets, is down less for the year. One of its oil-related holdings, Civeo Corp., lost half its value on Sept. 29 after the company disclosed its board opted not to convert into a real-estate investment trust, a change investors including Jana and Greenlight Capital Inc., had urged.
Jana increased the size of some of its holdings on the dips last week, including in energy stocks and Walgreen Co., according to an investor and a regulatory filing.
Millennium Management LLC, a $24 billion firm based in New York, saw losses trip some of the firm’s internal loss limits as major takeover deals like Shire hit headwinds.
Millennium is known for having a tight leash on its traders and in this case cut off several of its portfolio managers from trading further because of losses, a person familiar with the firm said.
Not all hedge funds have been hurt, though some investors say they consider flat returns or losses of just 1% to be wins for the month. The S&P 500 is down 3.5% this month, while the Dow Jones Industrial Average is down 3.8%.
Former Goldman Sachs Group Inc. executive Ray Iwanowski posted gains of about 4% this month and 11% this year in his Secor Alpha Fund LP, thanks in part to quantitative models that helped navigate choppy trading in U.S. small-company stocks, a drop in oil prices and a rally in U.S. bonds, a person familiar with the firm said.
The nearly $9 billion stock hedge-fund Maverick Capital Ltd. was up 0.7% for the month through Friday, according to a person familiar with the matter, and up 3.4% for the year. Its Maverick Select fund was up more than 10%.
At the New York offices of Conquest Capital Group LLC, a $300 million firm that bets on macroeconomic trends, portfolio manager Jason Ruspini said he was in “good spirits.”
Conquest had bets on against indexes including Germany’s benchmark DAX and the S&P 500, while wagering on an appreciation in U.S. Treasury bonds. Conquest’s main fund is up 7% this month and 11% for the year.
“Our strategy was vindicated,” Mr. Ruspini said.
Corrections & Amplifications
Paulson & Co.’s Advantage Fund is down nearly 22% for the year through Oct. 14. An earlier version of this article incorrectly said Paulson & Co.’s loss for the year was 22%.