It's a sad and oft-told tale: The Bull Market that Got Away. The U.S. stock market has zoomed 22% so far this year, and bonds have been similarly spectacular. But all too many investors, worried about a correction, have hesitated and watched the opportunity for big gains slip away. Surely the "smart money" set--hedge funds and offshore investment outfits--wouldn't make the same mistake. Or would they?

Well, they did. Hedge funds, still reeling from a disastrous 1994, have let the U.S. bull market elude them. Overall, they gained an average of 7%, net of fees. From George Soros to Michael Steinhardt to Julian Robertson Jr., the smartest and nerviest investors in the world largely ignored--or worse, shorted--the technology-driven U.S. market. Nor did they profit from equally clear trends among overseas stocks and currencies--notably in Japan, where the yen rocketed and the market dived. Even funds specializing in emerging markets missed the rebound in the Mexican Bolsa. "They were underinvested and hedged," observes E. Lee Hennessee, a veteran hedge-watcher who tracks hedge funds at Weiss, Peck & Greer.

The result was a humiliating performance for hedge and offshore funds, which are designed for wealthy investors. Hedge funds can do pretty much anything--sell short, use leverage, and trade currencies. That usually gives them a big advantage over conventional money managers. And if the market nose-dives--as it threatened to do on July 19--their strategies will pay off.

So far this year, however, hedge funds have eked out single-digit returns, and were bested by even the most humdrum equity mutual funds. Hedge funds realized an average return of 8.3% in the first half, according to the hedge fund index compiled by Hennessee (table). Subtract the 1% or higher management fee and the 20% share of the profits withheld by fund managers, and the number creeps below 7%. Meanwhile, mutual funds achieved an average total return of 16.7%, net of fees.

QUANTUM LIMP. A good example of opportunities lost is the first-half saga of George Soros' $3.7 billion Quantum Fund, one of the investment world's top long-term performers. It turned in a lackluster 0.5% gain, net of fees, through July 12, following a meager 3% gain in 1994. Stanley Druckenmiller, managing director of the fund and Soros' top strategist, portrays the year as a succession of missed chances and miscalculations. Says Druckenmiller: "There were very good opportunities in bonds, stocks, and currencies tailor-made for a fund like ours, and I just blew it. I did not take advantage of those opportunities."

For Quantum--an offshore fund restricted to non-U.S. citizens--the year began on an off note. Soros' fund was long the Japanese market at yearend, 1994. The market has declined some 16% since then in yen terms. Soros' traders unloaded their Japanese stocks, but ran into liquidity constraints that sharpened their losses. Quantum lost still more money making bad currency bets during the dollar's slide in February and March. But the losses were offset by gains in the U.S. bond market, adding up to a generally flat six months. Soros' traders increased the maturities of their bonds, but "we should have gotten massively long," says Druckenmiller. "I correctly saw that the economy would slow down, and acted on that perception. But I thought it would be temporary"--just a transitory trading opportunity, not the vast source of profits it turned out to be.

If gloom prevailed at the Soros headquarters across from Manhattan's Carnegie Hall, there was considerably greater cheer near Grand Central Station, where Julian Robertson's $1.7 billion Tiger hedge fund boasted an 11.4% gain after fees through July 14. That was the best performance of the hedge fund behemoths. Unlike Soros, Robertson was bearish on Japanese stocks, though Tiger's currency trading was uninspired. The fund's gain was sufficient to make up for a crummy '94, when Tiger fell 8%. Hedge fund managers usually must recoup losses before they can draw incentive fees, which are generally about 20% of the profits.

MACRO MELTDOWN. For the mega-hedge-fund operator who suffered most in 1994--Michael Steinhardt--1995 has started on a generally upbeat note. The $500 million Steinhardt Partners fund gained 9.5%, net of fees, through July 14, lagging the market but far outpacing the 1.8% gains realized by "macro" funds--the fund category, shared by Soros and Robertson, that takes broad, leveraged bets on the global bond, currency, and stock markets. Steinhardt Partners plummeted 33% in 1994, so the fund will have to climb 50% this year to make its investors whole.

Not surprisingly, short-selling hedge funds sustained the worst performance of all. Fighting the tape clearly did not work this year--and the traditional hedge fund strategy of going short as well as long didn't do much better. "Any time you have an explosive upward market, hedge funds are not going to do as well," notes Harry Strunk, an investment consultant in Palm Beach, Fla., who specializes in hedge funds.

But don't sell the hedge funds short. They have a way of roaring back. Take Quantum. It was down 6% at the end of the first half. But then, one of the fund's positions paid off--big time. The gain, to the tune of $250 million or so, erased the loss and put Quantum ever so slightly into the plus column in just under two weeks. What rabbit did he pull out of the hat? Druckenmiller isn't saying. But the size and speed of the gain has all the earmarks of a leveraged bet on currencies. The old Soros-Druckenmiller magic is still alive and well. But it will take a lot more before Quantum will be able to generate the kinds of returns that were realized by ordinary investors who took a ride on the bull.

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