Ackman, Einhorn Lead Hedge Funds on Track to Rival '08 Slump

  • Einhorn's fund at Greenlight tumbled 17% through September
  • Claren Road assets slumped three-quarters in past 12 months

There’s no big bank failure on the horizon. The housing market is booming, not melting. Yet for a handful of well-known hedge fund managers, 2015 is looking a lot like 2008, when their industry suffered record losses and investor withdrawals.

David Einhorn and Michael Novogratz have slumped about 17 percent so far this year, and Bill Ackman declined almost 13 percent in a publicly traded fund. Sean Fahey and Michael Platt have seen billions of dollars flee their firms and are now managing less than a third of what they oversaw at their peaks.

Every struggling hedge fund has struggled in its own way, yet September did a lot damage for many managers, including Ackman, who slumped as much as in all of 2008. Six of the stocks that were most popular with the hedge fund set fell more than 20 percent last month, according to a report by Novus Partners Inc. The carnage added to a year of market twists and turns that included the unexpected surge in the Swiss franc in January, the rally in European government bonds in April and the surprise devaluation of the Chinese yuan in August.

“Hedge funds are reeling from a relentless rout that has all but killed a year’s worth of alpha in a matter of two weeks,” Stan Altshuller, chief research officer at Novus, wrote in a report discussing popular trades among some of the largest funds, including Ackman’s Pershing Square Capital Management and John Paulson’s Paulson & Co.

The losses for these managers stand out because hedge funds on average were able to hold their own this year, slipping just 3 percent on average through Sept. 30, according to Hedge Fund Research Inc. That’s better than global stocks. The industry pulled in about $40 billion in the first half of 2015 and if it keeps up that pace, it will be the best money-raising year since 2007. In 2008, hedge funds lost a record 20 percent and clients yanked $154 billion.

The hedge fund darlings that caused the biggest problems include SunEdison Inc., which tumbled 31 percent in the month, Valeant Pharmaceuticals International Inc., which dropped 23 percent and Cheniere Energy Inc., which lost 22 percent.

‘Acutely Unfavorable’

Einhorn, whose Greenlight Capital tumbled 3.6 percent last month, said in August that markets have become “acutely unfavorable” to his style of value investing. His hedge fund has lost money on energy and technology companies, as well as wagers on gold, which fell to a five-year low in July. Greenlight was down 23 percent in 2008.

At Fortress Investment Group LLC, Novogratz lost 4.3 percent in September through the 25th, the second monthly loss in three as sole head of the firm’s macro hedge fund. The ex-wrestler and former U.S. army helicopter pilot said in July he expected the U.S. to raise interest rates by September. Fortress Macro lost about 22 percent in 2008.

The 10 percent drop in stocks since May 21, when the Standard & Poor’s 500 Index hit a high for the year, has been brutal for hedge fund managers who have big stakes in a few companies with scant hedges or short positions. Ackman’s Pershing Square Holdings, the publicly traded security of his activist hedge, plunged 12.5 percent last month in his fund, bringing year-to-date losses to 12.6 percent. In 2008, Pershing Square dropped about 12 percent. Since July, the fund has tumbled 21 percent, erasing about $4 billion of assets, or almost all of the $4.5 billion Pershing Square generated for clients last year.

Commodity Slump

“We are willing to endure a high degree of stock price and portfolio volatility because we believe it allows us to achieve a greater degree of investment performance over the long term,” the firm wrote in its 2014 annual letter. “We believe that this strategy is appropriately matched to the long-term capital we and our investors have committed to the funds.”

Tumbling commodity prices forced the closing of several shops, including funds run by Cargill Inc.’s Black River Asset Management and Carlyle Group LP’s Vermillion Asset Management.

Another Carlyle-owned hedge fund business, Claren Road Asset Management, has struggled since last year when it lost money for the first time since it was started a decade ago. Wagers in U.S. mortgage companies Fannie Mae and Freddie Mac turned sour and investors rushed for the exits, leaving assets at around $2.3 billion, down from a peak $8.5 billion a year ago. Co-founder and co-chief investment officer John Eckerson is retiring at the end of the year, leaving Fahey as sole CIO. The credit fund gained 0.8 percent in August and 1.3 percent last month, paring losses this year to 5.2 percent.

BlueCrest, Saba

At BlueCrest Capital Management, which was one of Europe’s three biggest hedge funds in the aftermath of the financial crisis, co-founder Platt has seen assets slump to $9 billion from an all-time high of $37.4 billion two years ago. A computer-driven trading unit was spun off in January. Its biggest fund gained 2.8 percent this year through Sept. 25.

Boaz Weinstein’s Saba Capital Management has seen assets tumble to $1.7 billion from $5.5 billion three years ago, according to a person familiar with the firm. Clients accounting for 70 percent of assets in one of his funds bolted in the first quarter, according to court documents, after three years of losses. Just as the firm was making money again this year, returning 7.6 percent through Sept. 25, one of Canada’s largest pension funds sued Weinstein, saying he had “artificially manipulated” the value of some assets and shortchanged departing investors. Weinstein called the allegations “utter nonsense.”

Officials for the firms declined to comment on performance.

The poor performance could continue for funds that stick to stocks owned by lots of hedge funds, Novus’s Altshuller wrote. 

“During times like these, momentum stocks give a lot of alpha back, and certain types of managers can be especially exposed to the move,” he said.

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