For some hedge funds, it was like Christmas in July, notes the Wall Street Journal’s Heard on the Street column.
After a difficult two-month period for many hedge funds, some are now beginning to share their July results with investors – although, as FT noted on Thursday, others are not sharing, amid conflicts between funds and their administrators over the release of July performance reports.
Of the results that are available, says Heard on the Street, “an early look suggests that some funds were able to rack up big profits amid the markets’ woes, usually by betting on problems in the subprime-mortgage market”.
But with the recent collapse of several big hedge funds, investors remain on edge. Some predict big losses could soon emerge – “particularly [from] those that trade debt that doesn’t change hands frequently”, says the Journal.
One of the winners is said to be Hayman Capital Partners, a Dallas hedge-fund firm that manages more than $500m. One fund run by Hayman is up 240 per cent so far this year, and another is 150 per cent higher. The funds surged more than 60 per cent in July alone, according to an investor.
Balestra Capital Partners, a $210m New York hedge fund, saw gains of about 28 per cent in July, and is up about 80 per cent for the year, after fees. Balestra lost about 3.5 per cent last year with bearish bets on US housing and subprime loans. But the carnage lately has led to big advances, notes the Journal.
Patrick McMahon, who runs MKP Capital Management, a New York hedge-fund firm that manages $5.5bn, began getting worried about subprime-mortgage borrowers last year, according to people close to the firm, says the Journal. “He is looking good now”, with five funds up 10-26 per cent so far this year, thanks to bets against various risky debt products, including “junk,” or below-investment-grade, bonds, according to people close to the matter.
Another winner, says the Journal, is Lone Pine Capital, a hedge-fund firm run by Stephen Mandel Jr, which focuses on stock investments. It bucked the market with a gain of about 5 per cent in July and is about 20 per cent higher so far in 2007, according to investors.
For one month, at least, short sellers are likely to have enjoyed profits – “something that was a long time coming”. Vick Khoboyah of Wilowbrook Asset Management, an LA-based hedge-fund firm, has scored gains betting against consumer and financial shares, anticipating the housing slowdown.
Sol Waksman, who runs BarclayHedge, a hedge-fund data company, has received results for 415 of the 5,400 hedge funds in his database, reports the Journal. These funds have reported gains of 0.27 per cent in July, despite the drop of about 3 per cent in the S&P500 during the month.
Still, fixed-income arbitrage funds haven’t reported, in part because some of their investments take longer to price, because they don’t trade as regularly; so, says Mr Waksman, “I expect to see some losses there”.
Indeed, hedge funds aren’t out of the woods, warns the Journal. “Many hedge funds sitting on losses haven’t reduced the values, or ‘marks’, of the securities in their portfolios”. But if ratings companies make more downgrades of debt and more homeowners run into problems, “these funds will have to reduce those marks or their lenders will demand more collateral, sparking more selling, some traders say”.
A crucial date could be August 15, notes the Journal. “That is 45 days before the end of the third quarter, the date when investors in many hedge funds can give notice that they are pulling out their money. If many give notice, it could spark a rash of selling by funds looking to raise cash to cover withdrawals.”
Meanwhile, as a torrent of corporate debt hits the market in the weeks ahead, losses could grow for both investment banks and hedge funds, the Journal says. “The availability of credit has disappeared, and there are $220bn of [LBO] loans” that need to be financed, J. Kyle Bass, a managing partner at Hayman, told the Journal. “It is going to smoke investment banks. And many more funds will be carried out, feet first.”
Recent results of hedge funds may have more impact on the overall market than those of perhaps any month in recent years, notes the Journal. “That is because hedge funds have grown so much and increasingly use borrowed money to try to amplify their gains. If new losses emerge – on the heels of the recent drop in assets of more than 50 per cent by Boston hedge fund Sowood Capital and problems at funds run by Bear Stearns – it could spark worries that more funds will have to sell positions to stay afloat, putting new pressure on the markets.”
Meanwhile, FT Alphaville has also looked at some niche winners amid the subprime upheaval.