Jan. 8 (Bloomberg) -- Renaissance Technologies Corp. and JPMorgan Chase & Co., the world's biggest hedge-fund managers, trailed rivals in 2007 as stock-pickers with fewer assets sidestepped losses caused by the collapse of subprime mortgages.

The average hedge fund gained 10.4 percent last year, including 0.7 percent in December, according to data released today by Chicago-based Hedge Fund Research Inc. Seven of the 10 largest firms fell short of that mark, said people with knowledge of their returns. Six were quantitative managers, who use mathematical models for some or all of their trades.

``Quantitative funds are in the penalty box,'' said Stewart Massey, founding partner of Massey, Quick & Co., a Morristown, New Jersey-based investment consultant with $1.3 billion under advisement. Larger funds struggled because ``size is the enemy of performance,'' he said.

Big quant funds stumbled in August, when credit markets seized up as mortgage defaults increased. The largest funds at Renaissance and Goldman Sachs Group Inc. were down for the year. The highest returns were reported by managers who, unlike quants, use fundamental research to make investment decisions.

Winners included Chris Shumway of Shumway Capital Partners LLC, a Greenwich, Connecticut-based firm with $6.6 billion in assets, whose SCP Ocean Fund rose 51 percent; Brett Barakett's $3.7 billion flagship fund at Tremblant Capital Group in New York, which advanced 22 percent; and Arthur Samberg's Westport, Connecticut-based Pequot Capital Management Inc., whose core global stock funds with $2.5 billion of assets climbed 35 percent.

Harbinger, Paulson

Increases also were posted by managers such as Philip Falcone's Harbinger Capital Partners who focus on distressed securities and companies going through changes like mergers and spinoffs. Harbinger Capital Partners Fund more than doubled on wagers against mortgages and gains by metals companies. The New York-based firm manages more than $18 billion.

Of the largest hedge-fund firms by assets, New York-based Paulson & Co., which oversees about $28 billion, was a standout. John Paulson's Credit Opportunities Fund soared almost sixfold, helped by bets that subprime mortgages would tumble.

Ken Griffin's Citadel Investment Group LLC returned about 30 percent, driving assets at the Chicago-based firm to $20 billion from $13.4 billion in 2006. Citadel pumped $2.55 billion into E*Trade Financial Corp. in November on expectations that the online broker's home-loan holdings would rise in value.

Citadel also bought assets controlled by Sentinel Management Group Inc. in August, after the cash-management company based in the Chicago suburb of Northbrook, Illinois, froze client withdrawals.

Market Volatility

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested. The people who provided returns asked not to be identified because performance numbers are private. Officials for the firms declined to comment.

Stock market volatility increased in 2007 with the Standard & Poor's 500 Index rising 1 percent or more during 31 days, up from 16 in 2006. The benchmark fell more than 1 percent 58 times, compared with 36 a year earlier.

While market gyrations hurt quant funds, some stock-pickers profited by betting on a mix of rising and falling prices, known as long-short investing.

``Before 2007, even bad companies were rising in price,'' so managers with a penchant for so-called shorting struggled, said Ted Wong, chief investment officer at Constellar Capital LLC in New York, which manages $300 million.

Renaissance, Goldman Stumble

Managers who invest securities of companies and governments in developing countries gained 24.9 percent on average in 2007, according to Hedge Fund Research. That beat the 10.7 percent average gain of managers who buy stocks of some companies while betting that other companies will decline, using what's called an equity-hedge strategy. So-called macro managers who bet on swings in stocks, commodities, interest rates and currencies gained 12.2 percent on average.

James Simons's Renaissance Institutional Equities Fund fell almost 1 percent last year. When Simons started the fund, he said it could handle as much as $100 billion. At the end of last year, the East Setauket, New York-based manager limited inflows to $1.5 billion a month. The fund managed almost $26 billion at the end of September.

Goldman's Global Alpha fund dropped 38 percent through Dec. 28. The New York-based company's Global Equity Opportunities fund, which is a quant fund that trades only stocks, fell 30 percent in the first 11 months of the year, even after the biggest U.S. securities firm by market value and a group of outside investors shored it up with a $3 billion cash infusion.

`Doing Due Diligence'

The industry reported the most disparate returns in years, said Massey of Massey, Quick.

``I think that's a good thing for the industry,'' he said. ``People have realized that hedge funds aren't homogenous, and that you need to drill down when doing due diligence to understand the strategy and the amount of leverage used.''

Highbridge Capital Management LLC, a unit of New York-based JPMorgan, was a case in point. Its long-short equities fund rose 40 percent, while the Highbridge Statistical Opportunities Fund declined 14 percent.

This year may prove more difficult for managers to make outsize returns because of uncertainty over the U.S. economy and actions the Federal Reserve may take to prevent a recession, said Virginia Parker, president of Parker Global Strategies LLC in Stamford, Connecticut, which farms out money to hedge funds.

Traders expect the Fed to lower its target for overnight bank loans by half a percentage point to 3.75 percent at its Jan. 30 meeting and by another quarter point when officials gather on March 18, futures contracts on the Chicago Board of Trade indicate.

``The first two quarters will be tough,'' she said. ``Once that plays out, the second half of the year will be ripe with opportunities.''

Below are fund returns and losses provided by people with knowledge of the performance figures.

FUND
 (MANAGER)                                 2007
Paulson merger arbitrage                  52.0%
Paulson event arbitrage                  100.0%
Paulson Credit Opportunities             589.9%
Paulson Credit Opportunities II          351.8%
 (Paulson & Co., New York)
Passport Global Master Fund              219.0%
 (Passport Management LLC, San Francisco)
Harbinger Capital Partners Fund          118.0%
Harbinger Special Situations             170.0%
 (Harbinger Capital Partners, New York)
Highside Capital                          57.7%
 (Highside Capital Management LP, Dallas)
Eton Park Master Fund                     35.0%
 (Eton Park Capital Management, New York)
Pequot Core Global strategies             35.0%
 (Pequot Capital Management Inc.)
QIM Quantitative Global                   28.6%
 (Quantitative Investment Management LLC,
Charlottesville, Virginia)
Atticus European                          28.0%
Atticus Global                            25.0%
 (Atticus Capital LP, New York)
MKP Partners                              27.7%
 (MKP Capital Management LLC, New York)
Magnetar Capital Fund                     25.3%
 (Magnetar Capital LLC, Evanston, Illinois)
Tremblant Partners                        22.0%
 (Tremblant Capital LP, New York)
Cerberus International                    19.0%
 (Cerberus Capital Management LP, New York)
King Street Capital                       16.0%
 (King Street Capital Management LLC, New York)
Farallon Capital Partners                 14.8%
 (Farallon Capital Management LLC, San Francisco)
SAC Capital International Fund            13.0%
 (SAC Capital Advisors LLC, Stamford, Connecticut)
OZ Master Fund                            11.7%
 (Och-Ziff Capital Management Group LLC, New York)
Pure Alpha Fund                            9.5%
Pure Alpha Fund enhanced                  12.4%
 (Bridgewater Associates Inc., Westport, Connecticut)
Highbridge Master fund                     8.5%
Highbridge long-short equities fund       40.0%
Highbridge Asia equities                  19.0%
Highbridge Statistical Opportunities     -14.0%
Highbridge Event Driven/Relative Value   -10.0%
(Highbridge Capital Management LLC/JPMorgan, New York)
D.E. Shaw Composite                        7.4%
Oculus                                    26.0%
 (D.E. Shaw & Co., New York)
Old Lane                                   2.8%
 (Citigroup Inc., New York)
32 Capital                                 0.3%
 (Barclays Global Investors, San Francisco)
Renaissance Institutional Equities Fund   -1.0%
 (Renaissance Technologies Corp., East Setauket, New York)
Prism Offshore Fund Ltd.                  -7.4%
Prism Partners QP                         -8.5%
 (Delta Partners LLC, Boston)
Global Alpha                             -38.0%
Global Equity Opportunities              -30.0%
 (Goldman Sachs Group Inc., New York)*

* Goldman's Global Alpha loss is through Dec. 28. Global Equity
Opportunities loss is through Nov. 30.

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net; Jenny Strasburg in New York at jstrasburg@bloomberg.net

Last Updated: January 8, 2008 16:23 EST