One Year Ago
»» Barnegat’s Bob Treue crowed about the opportunities presented to fixed income traders by the performance losses and closures of his competitors, and by the necessity of banks to disband their in-house trading teams. “In 2008 and 2009, the financial crisis caused several billion-dollar funds to close or shrink,” he said at the time. “Now…the Volcker rule is forcing several bank proprietary desks to close,” he added, noting that “no matter what the business, less competition is an appealing attribute.”
Barnegat’s flagship fixed-income relative value fund—which has only suffered one down year in 11 (2008), and which followed that 37.62% loss with a 132.68% gain—was up 11.17% in 2011 (data here). The fund was up 15% for 2012 through the end of February, according to an investor.
Treue says his prediction panned out, and that a flood of money has not flowed back into funds managing his strategy. “It is particularly difficult to raise money for fixed income arbitrage, because [the strategy] is most famous for going bankrupt (LTCM, etc),” Treue wrote in an email to AR. “Additionally, the Dodd-Frank/Volcker Rule legislation has forced bank prop desks to close. Simultaneously, governments have continued to intervene in bond markets and money markets around the world. This has created excellent opportunities.”
»» Widespread performance gains in 2010 helped drive assets at the 225 largest hedge fund firms in the Americas to $1.297 trillion. Despite the performance losses of 2011, the recently released Billion Dollar Club includes a more robust 241 firms managing $1.335 trillion, a nearly 3% year-over-year increase in assets.
»» Ben Heller resurfaced at Hutchin Hill Capital. The former emerging markets portfolio manager and managing director at HBK Capital Management joined the firm’s flagship Hutchin Multi-Strategy fund as a portfolio manager focused on emerging markets and global macro investing.
That fund ended 2011 down 4.99%, but Hutchin Hill increased its assets from $700 million in late 2010 to $1.3 billion on January 1, 2011. The firm has also continued to add talent, having recently hired former Eton Park derivatives trader Omar Saed as a principal and portfolio manager.
Five years ago
The $1.5 billion Bear Stearns High-Grade Structured Credit Strategies fund produced its 40th consecutive positive month. The fund embodied the concept of false alpha, as its seemingly-steady gains were the product of it having taken enormous risks. It had made long bets on subprime mortgage-backed securities and in some cases leveraged those bets dramatically.
That fund, and a more highly leveraged version, suffered losses in March and April as rising interest rates finally broke the long-expanding housing bubble. Following redemption requests from investors and collateral calls from lenders, Bear Stearns proposed a $3.2 billion bailout that would keep the funds’ creditors from seizing and selling assets. Despite then infusing $1.6 billion, Bear Stearns began to dissolve the funds less than a month later.
In hindsight, the funds’ spectacular demise highlighted the perils of a bank running a hedge fund platform (see Behind Bear’s Fall). It also foreshadowed the collapse of Bear Stearns and the 2008 financial crisis.
See also: Tallying the losses for 2007 • U.S. indicts Bear Stearns hedge fund managers • Barclays, Bear Stearns settle HF fraud claims
»» Bad news for Bear Stearns was the best possible news for John Paulson who made one of the largest hedge fund fortunes in history by betting on the downfall of the types of subprime-related securities into which the Bear Stearns credit funds had overleveraged themselves.
The Paulson Credit Opportunities fund, launched in 2006, earned 66.88% in February 2007 (data here). It ended the year up 589.62%. Paulson & Co. earned $15 billion that year from its multiple short bets on mortgage securities.
As Paulson explained in his keynote address at the 2007 AR Symposium, held in December of that year, “If we were wrong on this trade, we’d lose 7% … If we were right and the securities fell 50% in value, we’d make 568%. And, essentially, that’s what happened.”
See also: Paulson Launches Credit Fund • Subprime woes? No, easy money
