Hedge Funds May Be Stung by Losses in October

Discussion in 'Wall St. News' started by CPTrader, Oct 30, 2005.

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    October 31, 2005
    Hedge Funds May Be Stung by Losses in October
    Some of the year's best-performing hedge funds are nursing big losses for October, stung by reversals in energy stocks, takeovers and investments overseas.

    Some large hedge fund managers are facing losses of 5 to 10 percent for the month, according to people briefed on the results. The losses may be tied in part to many funds selling their biggest winners at the same time, putting pressure on prices.

    October, historically the cruelest month for investors, has been rocky. Despite a rally on Friday, the Standard & Poor's 500-stock index is down more than 2 percent for the month, and Treasury yields have recently spiked. Comments by Federal Reserve officials early in the month set off fears of rising inflation, while crude oil prices have eased.

    Yet hedge funds - private, lightly regulated pools of capital - are not supposed to ride the currents of the markets, but are intended to be "uncorrelated," meaning they hope to produce returns that are superior to conventional investments. That is why wealthy investors and big institutions are willing to pay hedge fund managers hefty fees, typically a management fee of 1 to 2 percent and a 20 percent slice of the profits.

    The disappointing results for October suggest the explosion in hedge fund growth has led too much money chasing too few investments. For example, a number of hedge fund managers followed the hedge fund star Edward S. Lampert into Sears, where he is also chairman. Sears is down 5.6 percent this month.

    "Everyone is long the same stuff," said Robert L. Chapman Jr., a veteran fund manager who is returning from a sabbatical to raise a new hedge fund. "Investors piggyback off of competitors' research, but then get easily spooked when the stocks move against them."

    Hedge funds may now be particularly jittery, because investors who want to redeem their holdings by the end of the year can put in requests as early as November.

    "This will clearly be one of those months that people look at to see how specific funds fared," said Antoine Bernheim, publisher of The U.S. Offshore Funds Directory.

    Some of this year's top-performing hedge funds have given back portions of their profits in October. The flagship hedge fund of Atticus Capital, an $8 billion manager, is down 9 percent for the month as of last week, although the fund is still sitting on gains of 40 percent for the year, according to a person briefed on the results.

    Third Point, a hedge fund firm managed by Daniel S. Loeb, a well-known activist investor, is facing a loss of around 9 percent this month for its largest fund, leaving it with a gain of more than 11 percent for the year so far, a person briefed on that fund's results said. The person declined to speak for attribution, citing regulatory restrictions on promoting hedge fund results. And York Capital, a $7 billion manager, was nursing a loss of more than 4 percent as of the middle of this month, while clinging to a nearly 3 percent gain for the year, according to a person with knowledge of its performance.

    Hedge funds that specialize in picking stocks have been particularly hurt this month, as have so-called activist funds, which push for companies to sell assets or take other actions to raise stock prices. And some hedge funds have made big bets on commodity companies that have soured in recent weeks. Atticus, for example, owns nearly 4 percent of Phelps Dodge, a copper producer, whose shares are up almost 23 percent this year but down almost 10 percent from their highs earlier this month.

    Another popular stock with hedge fund managers, including Carl C. Icahn, has been Kerr-McGee, the oil exploration company, whose shares are up 48 percent this year, but down 13 percent since late September.

    Hedge funds have also been hurt by a reversal in European stocks. Among the losers is Gartmore, a hedge fund manager based in London, whose biggest fund is down 2.8 percent this month, as of last week, according to a person briefed on the results.

    A recent letter from Gartmore managers to investors said that "something is broken" in European stock markets, The Financial Times reported on Friday.

    Funds have also been hit by losses in a variety of other areas, including emerging markets and junk bonds. Deals that have been withdrawn, like the proposed buyout of Cablevision, and deals that may be in trouble, like Johnson & Johnson's acquisition of Guidant, have also weighed on hedge funds.

    Hedge funds, of course, have weathered turmoil and downturns before. This spring, hedge funds that specialize in the credit markets were wrong-footed by a cut in General Motors' credit rating that roiled the markets. Many of those funds rebounded, and the average hedge fund was up 7.4 percent through September, according to an index from Hedge Fund Research, versus a total return of 2.8 percent for the S.& P.

    Some investors in hedge funds take comfort from that rebound.

    "This is a good time to invest," said Sandra Manzke, a hedge fund consultant. Some energy stocks, for example, "have a long way to go," she said.

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  2. I don't see any impetus for a rally before the end of the year. If the funds are so far down that "painting the tape" won't help at all, they might as well take a bath this quarter to make it easier to bounce back in the new year.

  3. Brandonf

    Brandonf ET Sponsor

    How is it easier to get back if they take a bath? They still have to get over their high water marks.
  4. the best funds don't publicize their results and hence are not part of these "index" calculations