Hedge-fund manager John Paulson is one of the biggest beneficiaries of a great rotation from bonds to stocks at the firm led by Anthony “the Mooch” Scaramucci.
Scaramucci’s SkyBridge Capital II LLC, a New York-based adviser that allocates client capital to outside money managers, has been moving cash from income-producing hedge funds, such as those that buy bonds, to event-driven funds that bet on stocks. SkyBridge’s main fund of funds steered $490 million, or 15 percent of its invested capital, to Paulson’s funds in the six months ended Sept. 30, regulatory filings show, as the billionaire manager’s main strategies surged.
With the Federal Reserve preparing to scale back its debt-buying program and the 30-year bull market for bonds showing signs of coming to an end, some institutional investors such as SkyBridge have been shifting away from fixed-income hedge funds. Individuals too are fleeing bonds and piling into stocks, boosting the idea of a great rotation. Bond mutual funds in the U.S. had redemptions of $133 billion in the five months through October while stock funds pulled in $56 billion, according to the Investment Company Institute in Washington.
“Following a couple of years of very strong returns in the credit space, we had a sense in the beginning of the year that had largely played out,” said Michael Rosen, chief investment officer for Angeles Investment Advisors LLC, a Santa Monica, California-based consultant to institutions. Rosen’s firm sought to increase its exposure to equity markets, he said, “whether that was through activist or traditional long-short funds.”
The Standard & Poor’s 500 Index generated a 32 percent total return this year through Dec. 27, including reinvested dividends, while the Barclays U.S. Aggregate Index, a benchmark for bond funds, fell 2.1 percent.
Wall Street strategists continue to debate whether individual investors have begun a major switch from bonds to stocks, a phenomenon that Bank of America Merrill Lynch analysts coined the great rotation in a January 2011 research report. Luke Montgomery, an analyst at Sanford C. Bernstein & Co., wrote last month in a research note that the notion of a great rotation lifting equities is flawed because there’s no automatic correlation between the migration of money and asset prices.
Managers who use equity-hedge and event-driven strategies got net deposits of $9.3 billion and $16.4 billion, respectively, in the first nine months of this year, and relative-value funds, which rely on a range of strategies tied to bonds, took in $20.6 billion, according to Chicago-based Hedge Fund Research Inc. In 2012, relative value dominated with deposits of $41 billion as equity-hedge and event-driven funds lost a combined $17 billion to withdrawals.
The $2.5 trillion hedge-fund business had 27 percent of assets devoted to equity-hedge strategies as of Sept. 30; 27 percent to relative value; 26 percent to the event-driven group; and 20 percent to macro funds, whose managers seek to profit from macroeconomic trends by trading a range of assets.
“We are seeing investors lean toward long-short equities,” said Ronald Lake, co-chairman of Lake Partners Inc., a Stamford, Connecticut-based firm that advises clients on investing with third-party managers. “But among the institutions who are more geared toward a stable return or highly diversified hedge-fund strategies, there is still a pretty broad mix of equity, fixed-income, credit and macro approaches.”
Long-short managers can wager on and against stocks.
The shift into equities is sharper at Scaramucci’s firm, whose SkyBridge Alternatives Conference is the largest annual U.S. symposium for hedge-fund managers, featuring speakers from former U.S President Bill Clinton to actor Al Pacino. Scaramucci’s ability to network and draw big names to the annual event has earned him the nickname ‘the Mooch’ in the hedge-fund industry.
Scaramucci, 49, played a cameo role in Oliver Stone’s 2010 sequel ‘Wall Street: Money Never Sleeps.’ Before starting SkyBridge in 2005, Scaramucci, co-founded Oscar Capital Management LLC, which he sold to Neuberger Berman LLC in 2001. He previously worked at Goldman Sachs Group Inc. in private-wealth management.
The portion of the $4.4 billion SkyBridge Multi-Adviser Hedge Fund Portfolios LLC’s fund holdings in event-driven strategies rose to 64 percent as of Sept. 30 from 52 percent as of Dec. 31, while the proportion devoted to relative value fell to 33 percent from 45 percent.
The fund added $399 million in Paulson Recovery Fund in the second and third quarters, according to regulatory filings, and it put $91 million in Paulson Partners Enhanced LP in the latest quarter. Sixteen percent of the fund’s $3.26 billion of invested capital as of Sept. 30 was allocated to Paulson.
Paulson, 58, ranked 99th on the Bloomberg Billionaires Index as of Dec. 27 with a net worth of $11.4 billion, down $450 million year-to-date. His main funds are generating double-digit returns this year, regaining some of the ground lost to soured bets on the U.S. recovery, the euro crisis and gold that helped cut assets by about half from their 2011 peak.
Paulson & Co.’s Recovery fund climbed 55 percent in the year’s first 11 months and its Partners Enhanced fund advanced 28 percent, people briefed on the returns said earlier this month. The Recovery fund was created to profit from a rebounding economy, while Partners Enhanced is the leveraged version of the firm’s merger strategy.
Armel Leslie, a spokesman for Paulson who works for WalekPeppercomm, declined to comment on the returns.
Paulson, best known for making $15 billion in 2007 betting against subprime mortgages, is benefiting from prescient bets on companies in takeovers, a strategy known as merger-arbitrage, and from investments in stocks that rallied as global central bank policies propped up markets.
The SkyBridge fund of funds invested $152 million in the Jana Nirvana Fund, a concentrated version of the stock vehicle run by Barry Rosenstein and David DiDomenico, during the second and third quarters, and added $55 million to its holdings in Daniel Loeb’s Third Point Ultra Ltd., filings show.
SkyBridge has reduced its holdings in the Pine River Fixed Income Fund and JLP Credit Opportunity Cayman Fund Ltd. since March 31. The fund pulled all $60 million it had in the SPM Core Offshore Fund Ltd., which invests in mortgage debt, and withdrew its capital from funds run by Rajiv Sobti’s Karya Capital Management LP, a New York-based macro investor with a fixed-income background.
Suzanne Hallberg, a SkyBridge spokeswoman, declined to comment on the fund of funds, which gained 9.7 percent in the first 10 months of this year, according to a performance update. The Bloomberg Global Aggregate Hedge Fund Index, which tracks some 2,400 funds with about $470 billion in assets, rose 6.9 percent during the same period.
SkyBridge isn’t backing away from all debt-related strategies. The firm added to its holdings in several event-driven funds that focus on debt markets, including the Premium Point Mortgage Credit Fund and the Marathon European Credit Opportunity Fund LP.
The 2010 Dodd-Frank Act, which prompted banks to cut back their proprietary trading, is creating more opportunity for independent managers to profit, according to Matt Quinn, director of research at Lee Financial Corp., a Dallas-based wealth management firm.
“We actually think there are more opportunities on the credit side,” Quinn said. “You don’t have the bids and the inventory that are kept by the banks like they used to, so it causes a little bit more price dislocation.”
Troy Gayeski, senior manager for the SkyBridge fund of funds, said in a September interview with Bloomberg Television that equities are still the most attractive “vanilla” asset class, given the outlook for U.S. economic growth and continued low interest rates.
Event-driven equity strategies that focus on corporate events, activist positions and share buybacks “are a very great place to be because you don’t need equities to go up to generate attractive returns,” Gayeski said in the interview. Asked about credit-related funds, he said, “you just don’t have any appreciation potential from here.”