Hedge funds lose money even as stocks, bonds rise
Despite gains in major US indexes, some of Wall Street's biggest investors are taking a beating.
By Gregory Zuckerman, Rob Copeland and Juliet Chung, The Wall Street Journal
Some of the biggest investors on Wall Street are losing money with wrong-way bets in markets around the globe, a surprising black eye amid a rise in stock and bond prices.
Hedge-fund managers including Paul Tudor Jones, Louis Bacon and Alan Howard are among those who have misread broad economic and financial trends. Some have lost money as Japanese stocks fell, while others have been upended by the surprising resilience of U.S. bonds.
An unusual period of calm has exacerbated problems for many trading strategies dependent on volatile markets. The losses by these so-called macro investors are contributing to a trading slowdown hurting the largest investment banks.
The flagship fund at $15 billion Moore Capital Management, led by star investor Bacon, was down 5 percent this year through the end of May, the firm has told clients. Jones's flagship fund at $13 billion Tudor Investment is down 4.4 percent this year, according to a person familiar with the firm.
By comparison, the S&P 500 index ($INX) is up 5.4 percent this year, including price gains and dividends, and the Barclays U.S. Aggregate bond index, a standard measure for debt investments, is up 3.4 percent.
Funds operated by Howard's Brevan Howard Asset Management, Fortress Investment Group (FIG), Caxton Associates, Discovery Capital Management and Balestra Capital also have posted losses, according to people familiar with their performance.
It is always difficult predicting broad trends, and the losses could quickly reverse. But hedge funds charge high fees with the expectation of impressive performance in any kind of market, and these investors built reputations with prescient market picks. Those running so-called macro funds generally bet on macroeconomic trends in global markets while investing in stocks, bonds, commodities and currencies.
"Macro investors have had a very, very hard time with the fact that bonds have done well and volatility is so limited," said Matt Litwin, director of research at Greycourt & Co., a Pittsburgh-based investment firm that invests $9 billion in hedge funds and other firms but has been reducing some of its investments with macro hedge funds. "There are a lot of losers."
Many funds piled into Japanese shares last year when they began rallying. But the Nikkei Stock Average is down 7.1 percent since reaching a high in January, amid doubts about the sustainability of Japan's economic recovery. Fortress, a $63 billion firm, has acknowledged to investors in its Fortress Macro fund that it was hurt by both this year's run-up in U.S. Treasury prices and weakness in the Nikkei. The Fortress Macro fund was down more than 3 percent this year as of June 6.
Brevan Howard Capital Management's roughly $28 billion flagship fund was down 3.8 percent through June 6, according to an investor in that fund, with interest-rate and bullish Nikkei bets among its losers. Caxton Associates in New York, an $8 billion firm, has lost money every full month this year and was down more than 6 percent at the end of May, according to the firm's investor updates, partly due to bearish currency positions.
Kyle Bass's $2 billion Hayman Capital Management LP has lost money on wagers against some European countries, as well as a bet on further weakening of the Japanese yen, people familiar with the firm say. The Dallas-based firm's main fund suffered its steepest two-month drop in five years at the start of the year and fell more than 6% in the first quarter, these people say.
Woodbine Capital Advisors, a well-known fund run by Joshua Berkowitz, a former senior trader at Soros Fund Management, recently announced plans to stop managing outside money after disappointing returns.
Larger funds have a handicap in slow markets: They can be too big to trade in smaller markets that are seeing more volatility.
"You can't put $1 billion in coffee contracts and expect to get out quickly, so the big funds can't have these smaller plays in their portfolios," said Sam Diedrich of Pacific Alternative Asset Management, an Irvine, Calif., firm that invests in hedge funds.
The setbacks for macro investing -- a style made famous by George Soros and others who anticipated past market turns -- come after a rush of investors embraced this approach to trading, thanks to its impressive performance during the financial crisis.
Macro funds on average gained 4.8 percent in 2008, even as the S&P 500 fell 37 percent. Other investors saw how John Paulson, a onetime merger specialist, made $20 billion in profits at his firm, Paulson & Co., anticipating the 2008 meltdown, and they vowed to adopt macro strategies as well.
Today, there are 1,865 hedge funds focusing on macro investing, up from 1,233 in 2008, according to HFR Inc., which tracks the hedge-fund world. That growth is much faster than that of the overall hedge-fund business. Macro funds manage $508 billion, up from $279 billion in late 2008. But macro funds have had three years of disappointing returns.
The poor results are prompting investors to pull money from macro funds and are forcing some funds and other financial groups to scale back their trading. Large banks including Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS) and Barclays (BCS) execute many hedge funds' trades. Such banks tend to benefit from rising trading volumes and volatile markets.
Amid the recent quiet, many banks have posted soft results, and some have laid off traders. Goldman Sachs President Gary Cohn said last month that unusually slow markets had made it "difficult" for Wall Street firms. Morgan Stanley said this month it would cut jobs from its currency and rates-trading businesses in response to tepid investor activity.
Some worry that a lack of volatility will continue to haunt various markets, perhaps until the Federal Reserve signals higher interest rates are imminent following a long period with benchmark rates near zero.
"I actually find myself daydreaming about winning 'Dancing With the Stars' on some days in the office," Jones, of Tudor, joked at an investment conference this spring. "It's gotten to be very difficult, when you depend on price movement to make a living, and there is none."
Average daily bond trading has fallen to about $734 billion, the lowest level in more than a decade, according to the Securities Industry and Financial Markets Association. The CBOE Volatility Index, the most widely cited measure of investor expectations for daily stock-market swings, on June 6 slipped to 10.73, its lowest closing level since 2007, according to FactSet.
"These are very uninteresting times in the market," Jared Dillian, a former trader who now writes a newsletter, recently told his subscribers. "The goal is to not fall asleep."
—Dan Strumpf and Julie Steinberg contributed to this article.
More from The Wall Street Journal
"Some of the biggest investors on Wall Street are losing money with wrong-way bets in markets around the globe, a surprising black eye amid a rise in stock and bond prices. Hedge-fund managers including Paul Tudor Jones, and Alan are among those who have misread broad economic and financial trends."
Surprising??? Since at least 2007, hedge fund managers have, as a group, been so-far below the S&P 500 in performance it's mind boggling. One excuse is that they're not supposed to beat the market, they're not supposed to lose money. Well guess what? The typical big hedge funds each have lost money an avg. 3 years since 2007.
Yet these reporters keep up the mantra of "surprising black eye," "respected fund manager," etc. for these people fleecing billions per year off investors in undeserved fees.
Work with a good trading house, maintain your own accounts, and PAY for only TRADES.
Most Houses today provide information and guidance for FREE...
Depending on amounts invested with them ?? Normally increases services and tools they will provide to you/their Customers..
If you use their services or employees to "make trades" or if you invest in Mutual Funds, ETFs or Index Funds; More then likely you "will be paying for those services", EXTRA.
It takes some time and effort, to learn, research and maintain your own accounts...
Not as hard as some might think...You have to be able to only read and understand some of the simpler matters at first...And normally you can get a little help to start you off...
You can build your own Mutual funds and others, and invest in safer companies paying dividends.
Sit back and watch your money grow...Diversification is the key..
SINCE THE U.S. GOVERNMENT HAS BEEN PAYING DOWN IT'S DEBT
NOW FOR SEVERAL YEARS, IT IS BORROWING LESS MONEY,
THUS DEPRESSING INTEREST RATES. THE STOCK MARKET IS
THEN THE OTHER LIKELY CHOICE FOR A BETTER RETURN ON
YOUR MONEY. HEDGE FUND MANAGERS ARE NO BETTER
THEN A 6'TH GRADER IN PICKING GOOD INVESTMENTS THAT
WON'T LOSE MONEY.
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