Hedge Funds: First, You Get The Good News [WSJ]
Subprime Bets Paid Off For Some Last Month, But Losses May Emerge
By GREGORY ZUCKERMAN
August 3, 2007; Page C1
For some hedge funds, it was like Christmas in July.
After a difficult two-month period for many hedge funds, firms are now beginning to share their July results with investors. And 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 because many funds, particularly those that trade debt that doesn't change hands frequently, haven't shared their results.
One winner: Hayman Capital Partners LP, a Dallas hedge-fund firm that manages more than $500 million. One fund run by Hayman is up 240% so far this year, and another is 150% higher. The funds surged more than 60% in July alone, according to an investor.
Balestra Capital Partners, a $210 million New York hedge fund, saw gains of about 28% in July, and it is up about 80% for the year, after fees. Balestra lost about 3.5% last year with bearish bets on U.S. housing and subprime loans. But the carnage lately has led to big advances.
"We were just early about playing the theme last year, but now it's playing out quickly, and we think there's further to go," says Norman Cerk, a Balestra partner. "This isn't a contained problem."
Patrick McMahon, who runs MKP Capital Management LLC, a New York hedge-fund firm that manages $5.5 billion, began getting worried about subprime-mortgage borrowers last year, according to people close to the firm. He is looking good now. His five funds are up between 10% and 26% 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: Lone Pine Capital LLC, a hedge-fund firm run by Stephen Mandel Jr., which focuses on stock investments. It bucked the market with a gain of about 5% in July and is about 20% higher so far in 2007, according to investors.
For one month, at least, short sellers -- investors who bet on falling stock prices -- likely enjoyed profits -- something that was a long time coming. Vick Khoboyah of Wilowbrook Asset Management, a Los Angeles 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. These funds have reported gains of 0.27% in July, despite the drop of about 3% in the Standard & Poor's 500-stock index 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.
"I would expect to see some loses there," Mr. Waksman says.
Indeed, hedge funds aren't out of the woods. 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 Aug. 15. 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, some say.
"The availability of credit has disappeared, and there are $220 billion of [leveraged-buyout] loans" that need to be financed, says J. Kyle Bass, a managing partner at Hayman. "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. 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% by Boston hedge fund Sowood Capital and problems at funds run by Bear Stearns Cos. -- it could spark worries that more funds will have to sell positions to stay afloat, putting new pressure on the markets.
At the same time, pension plans and other large investors have moved into hedge funds in recent years, aiming for good results in all kinds of markets. |
