Lee Ainslie’s Maverick Capital Management LP, Steve Mandel’s Lone Pine Capital LLC and Ricky Sandler’s Eminence Capital LLC are beating global markets in 2012 as most stock hedge funds underperform for a fourth straight year.
The biggest fund at Ainslie’s $10 billion firm surged 20 percent through July, according to clients, who said the New York-based fund was helped by profitable bets on stocks it expected to fall as well as those it bet would rise, and by wagers outside the U.S. Mandel’s Lone Cypress hedge fund in Greenwich, Connecticut, returned 20 percent through Aug. 10, according to investors. Eminence Capital gained 16 percent through Aug. 3, according to clients of the New York-based firm.
The managers are leading a small group of stock pickers showing they can outperform market benchmarks after three years in which hedge funds were stymied as an increasing number of stocks reacted in the same way to macroeconomic events such as the European sovereign debt crisis. While equity hedge funds lost less than the U.S. market in 2008, they’ve lagged behind the Standard & Poor’s 500 Index by an annualized 12 percentage points since. The lackluster returns caused pensions, endowments and foundations to pull money just as some funds rebound.
“We had to work hard last year to get our clients to stay the course, but I think they are really glad they did,” said Stewart Massey, chief investment officer of Massey Quick & Co., a Morristown, New Jersey-based firm that invests in hedge funds. He said he has a “healthy” allocation to stock hedge funds.
Stock funds lost 3.1 percent this year through July, according to data compiled by Bloomberg, while the S&P returned 11 percent and the MSCI World Index gained 7.7 percent. Hedge funds of all strategies returned 1.9 percent, on average, in the first seven months of the year.
Among the outperformers this year is John Burbank’s San Francisco-based Passport Fund, which gained 13 percent through July. Burbank, who told Bloomberg TV on June 29 that U.S. second-quarter earnings shortfalls would be “habitual,” was 40 percent net short as of early that month. Most stock funds were 46 percent net long at that time, according to Morgan Stanley’s prime brokerage unit.
Net exposure is calculated by subtracting the percentage of a hedge fund’s short positions, or bets on falling prices, from its long holdings, or wagers on rising stocks.
Executives at the hedge funds declined to comment on performance.
The popularity of equity hedge funds has been waning since 2000, when they accounted for 56 percent of total assets. The funds now represent 27 percent of the $2.1 trillion industry, according to Hedge Fund Research Inc. in Chicago, in part reflecting declining performance since the global financial crisis.
Last year stock hedge funds lost 7.5 percent on average, according to data compiled by Bloomberg, while the S&P 500 Index climbed 2.1 percent with dividends reinvested. Managers struggled to profit amid an increase in correlation, or stocks falling and rising in lockstep with little regard to fundamentals such as earnings or sales growth.
The hedge funds have suffered from the same market anomalies that have undermined stock mutual funds over the past years. Correlation between the members of the S&P 500 Index and the U.S. benchmark peaked in October and remains at above-average levels, according to Westport, Connecticut-based Birinyi Associates Inc., which used data going back to 1980.
“It’s been a tough area with the macro environment of risk on/risk off because that leads to high correlations,” said Craig Thomas, director of investments for the $1.2 billion endowment of Winston-Salem, North Carolina-based Wake Forest University.
The school is holding onto its equity hedge funds, and focusing on managers who have shown they can make money shorting stocks as well betting on rising prices, rather than those who charge the industry’s standard 2 percent of assets and 20 percent of gains for returns in line with the market, he said.
Industrywide, stock hedge funds saw $4.3 billion in redemptions in the first half of the year, the most of any strategy, even as hedge funds reaped $20 billion in deposits, according to HFR. Redemptions will probably continue as a Credit Suisse AG survey of 157 investors from the Americas, Europe and Asia, showed 26 percent plan to cut their allocation to long-short equity funds in the third quarter.
Not all the biggest managers are outperforming. Steve Cohen, who runs the $14 billion SAC Capital Advisors LP in Stamford, Connecticut, gained 6 percent through July, according to investors asking for anonymity because the information is private. Stuart Roden and Peter Davies’ London-based Lansdowne Developed Markets Strategy Fund, with $7 billion in assets, rose 6.3 percent through Aug. 10, after tumbling 20 percent last year.
Andreas Halvorsen’s Greenwich-based Viking Global Equities LP climbed about 9 percent in the first seven months, according to investors, a percentage point more than the MSCI World Index, though less than the S&P. Halvorsen, like Ainslie and Mandel, worked at Julian Robertson’s Tiger Management LLC, the pioneering firm that has spawned several top performers.
The stock funds that have attracted money this year tend to be niche or specialty managers.
Cevian Capital AB, a Stockholm-based activist fund run by Christer Gardell that focuses on European companies, raised $250 million from Virginia Retirement System and $150 million from the New Jersey Division of Investment.
The New Jersey pension fund, with $69.4 billion in assets as of May 31, committed $150 million to Wellington Management Co.’s Bay Pond Partners LP, a Radnor, Pennsylvania-based hedge fund that invests in stocks of financial-services companies, using credit default swaps, commodities and currencies to hedge macro risks.
Peter Gilbert, who runs the $1 billion endowment at Lehigh University in Bethlehem, Pennsylvania, said he’s heard other investors complain about the return of long-short funds. His funds, which he declined to name, have beaten their benchmarks.
“From our point of view they’ve worked out just fine,” Gilbert said.