For hedge funds, just one week can change their entire year.
With the stock market shedding billions of dollars in value and uncertainty in Europe stoking fear, some funds are watching their returns sink by double digits while others are shooting the lights out. August, in less than two weeks, has brought a 13% decline in the Standard & Poor?s 500-stock index and roughly 12% drop in the Dow Jones industrial average.
The turmoil has whipsawed some of the biggest names in hedge funds. John Paulson, for example, who made billions betting against subprime mortgages in the last market downturn, is racking up big declines in this one, in part because of his exposure to financial companies.
One of his main funds is down 31% this year ? and that was even before this week?s carnage in the market. William Ackman?s Pershing Square Capital Management, meanwhile, is down about 10% this year, with most of the loss coming this month, said a person briefed on the firm?s performance.
Pershing Square, which declined to comment, has major positions in companies like Citigroup and JC Penney ? two stocks that have declined sharply.
But doomsday funds, which position themselves to pay off in the event of a calamity, are awash in money. One such fund, Universa Investments, spent the year positioning itself for such a decline ? buying instruments that profit in the event of collapse but that lose money when markets are steady or climbing. Because of August?s rout, the firm is now up roughly 25% on the year, according to a person close to the fund who asked for anonymity because the information was private. 36South Capital Advisors, a London-based manager that also thrives in market calamity, is
up nearly 70% in one fund. ?Our philosophy is more like a trapper: we set volatility traps and the market falls into them,? said Jerry Haworth, the head of 36South, which returned more than 200% in 2008. ?We seem to have a windfall every time there is a systemic crisis. All the traps seem to get sprung.?
Bridgewater Associates and Brevan Howard, both among the largest hedge funds in the world, have also notched gains amid the market fallout, according to people familiar with the funds who requested anonymity because the information was private.
A different manner of trap has befallen some other hedge funds. Maverick Capital, for instance, an $11-billion fund run by Lee Ainslie, has lost 11% in one of its funds in August, according to an investor in the fund. Chilton Investment Company, which manages about $7.5 billion, has seen returns in its largest fund drop 8.5% since the start of the month.
Both funds engage in a strategy known as long-short equity, where managers have the latitude to bet on both the up and the down of a given stock. Because these hedge funds engage almost exclusively in stock markets, as opposed to buying up debt or loaning money, their returns are often more exposed to the broad market performance.
Maverick, which is closely watched by investors across Wall Street, has heavy exposure to Corning, Goodrich, and JPMorgan Chase, according to its most recent regulatory filings, companies whose share prices have fallen sharply in recent weeks. For Chilton, founded in 1992 by Richard Chilton, the poor performance in a number of energy companies like EOG Resources and Patriot Coal have helped contribute to a lackluster August.
Industry watchers say it has been a tough month for such traders because when markets collapse, it doesn?t matter how well you pick stocks. While many of these managers pride themselves on knowing which companies are undervalued and which are overpriced, everything tends to decline during a big market sell off.
?They?re the most directly tied to the markets,? said Tarek Helal, vice-president for the Alternative Investments Group at Raymond James. ?They?re also the least hedged. It seems like some of the names these folks were in are getting killed on the equity side.?
Both Maverick and Chilton began the month on decent footing, signalling the devastating effect just a few days can have on even the savviest investors.