Soros goes solo
Hedge fund legend George Soros, never exactly a quiet force in the industry, was in the spotlight for most of the year. First, he announced in June he was closing his enormous eponymous hedge fund to outside investors and running it as a family office. Two months later, he was slapped with a $50 million lawsuit by his 28-year-old ex-girlfriend for allegedly reneging on a promise to buy her a Manhattan apartment.
And he kept a high profile for other reasons. On top of being named the largest charitable donor in the U.S., according to the Chronicle of Philanthropy, he maintained his famous liberal streak, telling AR he would “wholeheartedly endorse” an Obama administration effort to end the carried interest tax break for hedge fund managers. He also signed an op-ed in the FT warning that the eurozone crisis could lead to the end of the European Union.
Soros’ legacy in the industry continues. Though his most famous protégé, Stanley Druckenmiller, retired in 2010, former employees of Soros’ hedge fund are beginning to ramp up new firms. Most notably, former Soros CIO Keith Anderson is planning to launch his own hedge fund in 2012.
Shumway steps down
Under fire after management changes, Chris Shumway announced he would return all outside capital in Shumway Capital Partners. The move came after he had told investors last December to submit redemptions requests or else tacitly approve the firm’s announced restructuring, in which founder (and Tiger cub) Shumway would step down as chief investment officer.
But when redemption requests came in that totaled 40% of Shumway’s $8 billion in assets, he decided to lay down his sword. Though he continues to run money for himself, Shumway no longer manages a Billion Dollar Club firm.
His former team quickly scattered, with tech chief Naveen Choundary laying plans for Eastwind Global Partners, among other launches.
D.E. Shaw rebounds
The year started with a whimper for the storied quant shop, with assets down nearly 40% from the start of 2010, to $14.23 billion, after major redemptions that followed lagging performance. The firm cut its management fee to 2.5% and performance fee to 25%—still higher than the industry average, but a drop from the 3%/30% breakdown that had helped turned scientist Shaw into a billionaire.
Assets had rebounded to $16.5 billion as of November 1 aided by impressive performance. The firm’s multistrategy Oculus fund was up 18.3% for 2011 through the end of November. Managing director Anoop Prasad credited the gains to a toughened attitude toward the firm’s models. “We understand that alpha decays,” Prasad said. “We are unsentimental about eliminating models that have decayed or died.”
Kovner retires
Caxton Associates’ Bruce Kovner announced he was retiring from the $9.4 billion firm he launched in 1983. He handed the reins to managing director Andrew Law, whose aggressive bet on the credit markets in 2008 had, one insider told AR, “saved the firm.” Law was said to have racked up a better than 100% return in his portfolio by the end of that year, helping Caxton Global Investments, the firm’s flagship fund, finish 2008 up 12.9%
Performance the next two years was not as strong. Caxton returned 5.8% in 2009 when the equity markets raced back up and 9.3% in 2010, compared with respective gains of 23% and 13% for the S&P 500 Index.
This year, the flagship $5.2 billion macro fund was up 1.37% for the year through Dec. 5, compared with a 0.75% rise for the AR Global Macro Index. Caxton is now actively soliciting new investments, an increasingly common move for some Billion Dollar Club firms, including Millennium Management, Third Point and HBK Capital Management.
Hedge funds hitch a ride on the cash cab
Cash was king for the hedge fund elite, as some Billion Dollar Club firms kept more than half of their portfolios out of the markets. Some told investors they wanted to have plenty of money set aside to protect against margin calls, changes in financing terms and severe market movements.
Among the biggest names hoarding cash was King Street Capital Management, which had nearly $10 billion of its $19.5 billion in assets held in cash as of August. Even some pension funds were holding double digit percentages of their portfolios in cash.
Standing pat might not have been a terrible move in a roller coaster year for returns. Six of the 16 strategies of the AR Global Database are negative for 2011, with the most dramatic drops among event-driven, global equity and managed futures funds.
More heartburn for Harbinger
Phil Falcone’s Harbinger Capital Partners’ regulatory problems continued through 2011. Most recently, the firm warned investors in December that it had received Wells notices from the Securities and Exchange Commission and could face charges related to preferential treatment of some clients, reportedly including Goldman Sachs. Those notices followed an earlier ongoing investigation by the SEC into whether Falcone had acted inappropriately in taking personal loans from the firm and whether the firm gave preferential treatment to some of its investors. Falcone had said the loan was disclosed to investors and vetted by Harbinger’s lawyers, and that he has never given any preferential treatment to any investors.
Besides the alleged market manipulation related to shorting stock and initial public offerings, Harbinger and Falcone state in a recent regulatory filing that they “strongly disagree” that there were any violations of securities law.
Harbinger also continues to face pressure on its fledgling wireless broadband network, LightSquared, which represented roughly 80% of the firm’s net asset value earlier this year. LightSquared has been a target of criticism because of possible interference with existing global positioning systems and perceived political favoritism. The company has fought both accusations.
And unhappy investors can’t necessary get out. In June, Falcone told investors who wanted to cash out of his flagship fund that they would receive in-kind payments of the firm’s illiquid holdings in LightSquared. More recently, Harbinger said it would suspend redemptions in several of its funds beginning at the end of 2011. Harbinger managed $6.18 billion on July 1, but the figure has fallen to $5.3 billion today. That’s down from a peak of around $24 billion in mid-2008.
Insider trading fall out
The fallout from the government’s recent slew of insider trading charges continued in 2011.
Notable impacts included the closure of David Ganek’s Level Global, which was shut down in February after being raided by the Federal Bureau of Investigation in November (the firm has not been charged with wrongdoing); Galleon Group founder Raj Rajaratnam was found guilty on 14 counts of securities fraud and conspiracy and was sentenced in October to 11 years in prison; and FrontPoint Partners, the once $11 billion firm, lost most of its assets following charges against one of its portfolio managers, Chip Skowron (the former doctor plead guilty and was sentenced to five years in prison in November).
Tiger re-opens
Julian Robertson’s Tiger Management quickly met its fundraising goal for the Tiger Accelerator Fund, raising $450 million for the seeding vehicle it began marketing earlier this year.
The co-seeding fund, which gives investors a piece of the fee revenue and performance from a group of six hedge funds already seeded with a combined $230 million from Robertson, offered the first opportunity in more than a decade to invest with the legendary Tiger founder.
The firm is reportedly considering a second accelerator fund given the success of the first.
Paulson’s annus horribilis
Hedge funds’ rough year has been synonymous with one name: John Paulson.
Paulson & Co.’s assets fell from $35.2 billion on July 1 to about $28 billion today amid double-digit losses in most of its funds. Paulson’s Advantage fund is down 31% for the year through November; its International fund lost 9% and Advantage Plus is down 47%.
Another blow came when a Paulson holding, Chinese timber company Sino-Forest, was accused of fraud in June (the firm has denied the claims but Ontario Securities Commission and Royal Canadian Mounted Police investigations continue). Paulson received a slew of negative press surrounding the stock’s collapse, but a letter later clarified that the firm’s actual losses from the position were only $107 million.
In October, Paulson was the subject of a protest by Occupy Wall Street demonstrators.
But despite what casual observers or competitors might have expected, Paulson has not suffered a wave of redemptions or an exodus of senior staff. Also, as was the case last year, Paulson’s exposure to gold has boosted his performance: His gold focused fund is up 11% year to date as of mid December and the gold denominated share classes of other funds are also faring better than their dollar-based counterparts.
Bridgewater outperforms, again
Ray Dalio’s Bridgewater Associates continues to shine. Last year was Bridgewater’s best ever, when the firm netted 44.8% in its Pure Alpha 18% volatility fund (“Pure Alpha II”) and 27.4% in the less-levered Pure Alpha 12% volatility fund (“Pure Alpha”). Bridgewater humbly warned investors that the returns were a once-in-20-years event.
Bridgewater’s hedge funds have done almost as well this year: Pure Alpha II is up 25.26% and Pure Alpha is up 15.92% for the year through November. As a result, Bridgewater was named Management Firm of the Year for the second consecutive year at the seventh annual AR Awards, held at the Mandarin Oriental in New York in November to honor the U.S. hedge fund industry’s top-performing managers. Pure Alpha was also named Global Macro Fund of the year.
The firm’s success led it to launch a new version of its leveraged beta All Weather strategy in December – the pension funds are almost certain to stream in.
