Hedge funds hit by quake-fueled market selloff

SAN FRANCISCO (MarketWatch) — Some hedge funds suffered big losses from the market selloff this week in the wake of Japan’s earthquake.

Funds run by Paulson & Co., Tudor Investment Corp. and Sparx Group (OSAKA:JP:8739)  were among losers, according to an update by Societe Generale’s (EURONEXT:FR:GLE)  Lyxor unit, which runs hedge fund-managed accounts.

A hedge fund vehicle run by private-equity giant Cerberus Capital Management may also suffer some losses.

A Japan-focused hedge fund run by London-based Arcus Investment Ltd. was down more than 10% through the middle of March.

Most of the losses were driven by the slump in the Japanese stock market, which tumbled more than 10% on March 15. The surge in the Japanese yen against the U.S. dollar also disrupted some trades, some hedge fund investors said.

Still, most of the losses were less than the stock-market declines in Japan. And since March 15, stock markets have recovered a bit.

“Many in the Long/Short space have suffered 5% to 10% losses,” said Ed Rogers of Wolver Hill Asset Management, a Tokyo-based firm that invests in a range of Japan-focused hedge funds.

“We know of one fund that suffered a 40% hit, but that is an extreme outlier,” Rogers added. He didn’t identify the fund.

A rebound in Japan’s stock market on Wednesday brought many hedge funds back from losses and “some remained in positive return territory throughout,” he said.

In Wolver Hill’s portfolio, four out of 12 managers are positive for March so far, with returns ranging from 4% to 0.15%, Rogers noted. Short positions, or negative bets, were the source of those gains, he added.

‘Fully functioning’

Wolver Hill told investors in a Friday letter that its Tokyo office was open and “fully functioning.”

“All of our staff and family members are safe and accounted for,” the firm wrote.

Wolver Hill’s underlying managers and their staff and families are also unaffected by the quake and tsunami, it added.

“We in Tokyo are truly unaffected compared to the people in Tohoku, 150 miles north of us,” the firm wrote. “The devastation there is almost incomprehensible.”

Nuclear situation

Wolver Hill also said that, even in a worse-case scenario involving multiple nuclear reactor meltdowns, there would be a “negligible” effect on Tokyo residents.

“As far as continued briefings from the US Embassy, British Embassy and US Chamber of Commerce (basically all sources independent of the Japanese government) are concerned, we have heard nothing that leads us to believe we are in any danger of radiation poisoning in Tokyo,” Wolver Hill wrote.

However, the firm criticized news organizations for making the situation worse.

“The psychological pressures, much of them created by irresponsible reporting by some Western news media sources, have made the situation far worse for people living here than the physical threats themselves,” Wolver Hill said.

Energy question

One risk that the firm and its underlying managers are concerned about is Japan’s access to energy.

“What we, and our underlying managers in Wolver Hill Japan Fund, are examining quite closely now is the potential effects of disruption to energy supplies to Japanese companies this summer when energy usage traditionally spikes,” Wolver Hill said.

“On this subject there is far more room for concern, with the possibility that individual companies may have to address significant logistics problems and/or energy supply problems,” the firm added.

Paulson

A fund run by Paulson & Co., the third-largest U.S. hedge fund firm, was hit by the big market selloff this week.

Paulson has run funds on the Lyxor managed-account platform for many years. One of those vehicles, known as Paulson Advantage Fund Limited, was down 6.14% this month, as of March 15, according to a Lyxor update obtained by MarketWatch. That loss left the fund down 5.29% so far this year.

Another Paulson fund on the platform — Paulson International Fund Limited — was down 2.25% this month, as of March 15. This fund is up 0.21% so far this year.

Japan’s stock market slumped more than 10% on March 15, dragging other markets lower.

Tudor Momentum

Tudor Momentum Fund Limited, another vehicle on Lyxor’s platform, was down 7.1% this month, as of March 15. That left it down 6.03% so far this year.

Tudor, a big hedge fund firm run by Paul Tudor Jones, launched the Tudor Momentum fund in 2009. It trades futures and uses computer models to try to profit from market volatility. It’s had an account on the Lyxor platform since October 2009.

Sparx

Sparx Long-Short Fund Limited, also on the Lyxor platform, was down 6.5% this month, as of March 15. That left it down 3.5% so far this year.

Sparx Group is one of the largest hedge fund firms in Japan. Shares of the company have lost more than a quarter of their value since the earthquake struck Japan on March 11.

Arcus

Arcus Investment, a value investing firm that was started more than a decade ago by Peter Tasker, Robert Macrae and Mark Pearson, has been hit by its focus on Japan.

The firm runs two hedge funds with exposure to the country — the Arcus Japan Long/Short fund and Arcus Zensen.

The Long/Short fund was down 10.8% this month, according to a March 17 update Arcus sent to investors. The Zensen fund was down 7.4% in the same period, the update said.

Yen disruption

Some other hedge funds saw Japan trades disrupted by the surge in the yen earlier this week.

Hayman Advisors, run by Kyle Bass, and Ore Hill Partners, run by Ben Nickoll and Frederick Wahl, have been betting on much higher Japanese interest rates, using options.

This type of trade is based on concern about Japan’s massive sovereign debts. The government is expected to have to spend heavily to help the country recover from the earthquake. That’s helped this trade generate some recent gains.

However, Hayman and Ore Hill also had short positions on the yen to hedge out currency risk involved in their interest-rate trades.

When the yen surged earlier this week, this hedge generated losses, offsetting some of the gains.

FX Concepts

Since then, the yen has weakened as the world’s major industrial nations intervened jointly in the foreign exchange markets. Read about the G-7 move here.

However, the U.S. dollar is still down about 2.5% versus the yen since the quake hit on March 11.

“The Japanese yen just spiked to new historic highs and this is proving confusing to many analysts who are focusing on the potential of a major nuclear accident and expect the yen to be weak,” said Jonathan Clark, vice chairman of FX Concepts, which runs one of the largest currency hedge funds in the world.

Clark was commenting in a Thursday research note to clients, before the G-7 intervention.

Clark said the yen surged on expectations Japanese financial institutions will have to liquidate some overseas assets and buy the currency to pay insurance claims from the quake.

“In addition, there will be attractive investment opportunities related to rebuilding that will attract money back to Japan,” Clark added in the Thursday note.

“The cycles call for the yen to trend higher during the next several months,” Clark wrote, although he stressed that the extent of the move will largely be controlled by leaders in Japan.

Clark also called the intervention.

“Although most developed countries outside of Asia frown upon currency manipulation, the rules change when a disaster occurs,” he wrote. “Japanese officials don’t want to see the economic vitality drained even further by a strong yen undermining exports and are reportedly intervening. It is possible other major central banks could join the Bank of Japan to show their support of the country.”

FX Concepts runs a currency-trading managed account on Lyxor’s platform. The vehicle, FX Concepts GCP Fund, was up 0.16% this month, as of March 15.

However, the fund is down almost 10% so far this year. It lost 9.75% in June, according to the Lyxor update obtained by MarketWatch.