Most rich people who invest their millions with the biggest hedge funds are lots happier than they were just a month ago. But they're still not as happy as working stiffs who stick their hard-earned retirement savings in a mutual fund tied to the Standard & Poor's 500-stock index.
After a first half that ranged from poor to lackluster by hedge-fund standards, the so-called macro funds, which make leveraged bets on stocks, bonds, commodities, and currencies, rebounded with a vengeance in July. The improvement resulted from a number of developments, including big gains in large-capitalization U.S. and European stocks, a surge in Russian and other emerging-market investments, falling U.S. interest rates, and the strengthening of the dollar against the yen and European currencies. But a key contributor was the funds' speculative plays on the Thai baht and other struggling Asian currencies, such as the Malaysian ringgit and the Philippine peso.
Yet even with the boost from the plunging baht, some of the world's most famous funds, notably Julian Robertson's Tiger funds and George Soros' Quantum Fund, trailed the S&P index, which is up 30.2% through July 31. (In March, Robertson initiated a libel lawsuit in New York State courts against BUSINESS WEEK arising out of a cover article that appeared in the Apr. 1, 1996, issue. The complaint has not yet been served.) Robertson declined comment. A spokesman for Soros declined to comment on investment strategy.
Referring to the hedge funds as a group, George P. Van, chairman of Nashville-based Van Hedge Fund Advisors, says: "They're in the third year of a marathon in which they're trying, mostly unsuccessfully, to beat the S&P." Although aggregate performance data aren't yet available for hedge funds through July, Van and other fund trackers say that most types of funds posted sharp gains in July but that all categories will likely continue to lag behind the S&P when the final returns are in. An estimated 4,700 hedge funds around the world manage about $225 billion of investors' capital, Van says.
The big losers: funds that specialize in selling stocks short, showing again that you can't fight a raging bull. According to Van, the shorts lost 9% in 1996 and have gained zilch through June.
BIG BETS. In the case of Tiger Management, the world's second-largest hedge fund company, with $10.5 billion under management, short positions in the baht, which has depreciated 28% since its July 2 devaluation, have helped make the difference between a poor year and a mediocre one. The firm's largest fund, Jaguar, posted a net gain of 11.7% through July 31 after a gain of only 0.7% for the first six months of the year. The fund scored a spectacular 40% net return last year, as big bets on U.S. stocks paid off. A person familiar with Tiger's performance said that as Robertson turned bearish earlier this year, Tiger converted some equity holdings to cash and added to its short positions.
George Soros, who has been attacked by Malaysia's Prime Minister Mahathir Mohamad for his currency plays, saw his flagship Quantum Fund gain 27%, after fees, through July 31, almost double the 14% gain achieved in the first half of the year and a sharp improvement over last year's dismal 1.5% decline. And Soros' Quota Fund, an equity and macro fund that uses outside investment advisers, surged 70.3% through July, up from 50% in the first half, according to Soros Fund Management.
PAPER LOSSES. In recent weeks, the fortunes of Soros, Tiger, and other big players took a sharp turn for the better as the Thai government gave up trying to prop up its beleaguered currency, according to hedge-fund, trading, and government sources in the U.S. and Asia, most of whom requested anonymity.
In June, when the Thai government reiterated its intent to maintain the official value of the baht at around 26 to the dollar, the big hedge funds were racking up paper losses on their currency short positions, if not their equity short positions. But as the futility of the effort became apparent, the Thai central bank surrendered on July 2, and the baht plunged 18% overnight.
Meanwhile, other, smaller hedge funds with short positions in the baht and Thai stocks had already bailed out, preferring to take smaller profits earlier. For example, Argonaut Capital Management, which oversees about $100 million in assets, liquidated most of its short positions in the baht and Thai stocks in June. Says President David Gerstenhaber: "I didn't have positions structured in a fashion that gave me the confidence to maintain them, given the uncertainties of what the Thai authorities were doing." The Asian currency play, he says, was "not a meaningful contributor to July performance."
To be sure, Asian currencies were not the only spark for the impressive July gains at the macro funds--or other fund categories, for that matter. Tiger is said to have benefited from its holdings in AMR, Intel, and Citicorp. Additionally, says the Hennessee Group, a hedge-fund advisory firm: "Most international managers were overweighted with substantial positions in European stocks" hedged against declines in European currencies. Argonaut, for example, attributed its 23.2% gain through July (vs. 10.4% through June) to holdings in large-cap European exporters such as Volkswagen, and L.M. Ericsson and U.S. multinationals, including Coca-Cola, IBM, and GE.
With their stellar July behind them, the hedge funds are surely hoping their midsummer dream lasts. But even if it does, they may still be hard pressed to beat the working stiffs.