The Big Hedge Fund Stories from 2011: Part 1

Date: Thursday, January 26, 2012
Author: Simon Kerr

Although individual news items can have can have historical significance (such as story number 1 below) the effort here is more to point to the themes and trends at work in the hedge fund industry last year. Here are my top stories for 2011:

1. Big Name Retirements – two of the best known names in the business stopped running other people’s money in 2011. George Soros turned Soros Fund Management into a family office in the middle of the year, allowing him to have some involvement, even if he is not the CIO at 81 years of age.

Bruce Kovner has handed over the investment reins at Caxton Associates to Andrew Law, and the macro maven is retiring. The extent of his future involvement in the $9.4bn firm is not clear at this point.

2. Regulatory Body Success in Prosecutions – after much effort over the years, regulators in the United States got some hedge fund scalps of significance in 2011. After the SEC was criticised for its handling of allegations against Pequot Capital Management, the Securities and Exchange Commission need the conspicuous success it achieved in the convictions against the employees and owners of Galleon Management. Galleon founder Raj Rajaratnam was convicted of insider trading and sentenced to 11 years in jail in October. Galleon trader Zvi Goffer, who controlled two insider dealing rings, was sentenced to 10 years in prison and ordered to pay more than $10 million in forfeitures.

The other conspicuous success was the case brought against Chip Skowron, portfolio manager at FrontPoint Partners. The healthcare stock specialist was convicted of insider trading in August and sentenced to 5 years in prison.

3. A Hedge Fund Winner From The Euro Crisis – that classic global macro management can still be effective was demonstrated by Kyle Bass (and Hugh Hendry) last year. Kyle Bass, the principal of Hayman Capital Partners, made capital (both monetary and reputational) out of the sub-prime mortgage imbroglio of 2007-8. It required patience and the ability to structure the trade right. Having demonstrated that trait and that ability in making great returns then, in 2008, Kyle Bass went on to talk about the potential for the indebtedness of some European countries to become an issue of significance. He also identified that the long-dated credit default swaps were a great way to give low cost of carry and a big pay-off. Bass’ patience and insight were rewarded in returns when the structural flaws of the European project became clear to everyone in 2011.

The classic global macro set-up of a structural imbalance and an option like pay-off was also successfully used by another contrarian, Hugh Hendry. Hendry shares with Kyle Bass a wariness of fiat currencies, but his pay off in 2011 came from sharing the trait of patience. The manager of the Eclectica Fund had pointed out some problems with the phenomena of Chinese growth in 2008, and in 2010 he began last year to short highly-cyclical Japanese corporate credits with high exposure to Chinese demand. The Eclectica Fund was up over 12% for the year by early December of last year.


4. King Quants Come Back – several of the hedge fund industry leaders made money for their investors applying quantitative techniques to markets, but the crowns of these kings of the algorithms have been tarnished by the aftermath of the quant shock of August 2007. The archetype has been the Goldman Sachs Global Alpha fund. The two founders of the research process behind the product, Mark Carhart and Raymond Iwanowski, left Goldmans in 2009, and the fund itself was closed in the fourth quarter of 2011.

But not every quant outfit has followed a route of inexorable decline. It was commented here last year that Renaissance Technologies Corporation, founded by Jim Simons, was back on form, and the Renaissance flowering was sustained into 2011. The Renaissance Institutional Equities Fund International Series B was up 32.47% through the end of November 2011.

The quant turnaround of 2011 was D.E. Shaw & Company. The firm had had a rough time post credit crunch. Asset growth is a function of returns, and returns for 2011 were excellent at D.E. Shaw & Co: the firm’s multi-strategy Oculus fund was up 18.3% for 2011 (through the end of November), and the flagship Composite Fund was up 3.8% over the same period. AUM at D.E. Shaw went from $14bn at the end of 2010 to $16.5bn in the 4Q of 2011.