Hedge Funds Extend Their Slide Hedge Funds Post Back-to-Back Monthly Declines
A bumpy trading environment is tripping up hedge funds.
Big stumbles by some star managers drove hedge funds to back-to-back monthly declines for the first time in two years, according to researcher HFR Inc.
The lackluster showing—the average hedge fund trailed benchmarks for both stocks and bonds in April—was a blow for an industry that charges more than other fund managers but pitches steady returns in both good times and bad.
Hedge funds on average dropped 0.17% in April, HFR said Wednesday, following a 0.33% decline in March. Funds hadn't turned in two consecutive losing months since April and May of 2012, HFR said.
That performance also trailed the broader stock market, where the S&P 500 rose 0.74% in April, including dividends. Many hedge funds, however, invest in markets other than stocks, and bet concurrently on some positions rising and others falling.
Brad Balter, a Boston-based adviser who helps wealthy investors choose hedge funds, said his clients increasingly are weighing whether they should continue pouring money into these highly paid managers.
"I'm not saying you should judge people in a single quarter, but there's less rope for poor performance," Mr. Balter said. He called the industry's showing in recent years for the most part "mediocre."
The latest industrywide figures come the same week a survey by the trade publication Institutional Investor's Alpha showed that the top 25 highest-earning hedge-fund managers collectively made $21 billion in 2013, an increase of more than 50% over 2012.
Most hedge funds charge some variation of the "2 and 20" model, in which the firm collects a 2% management fee and 20% of investment profits.
Some of the biggest losers among fund managers in April were those who tried to ride last year's big winners: tech stocks.
Coatue Management LLC, the $9 billion New York firm started by Philippe Laffont, a veteran of Julian Robertson's Tiger Management, slid about 4% for its second consecutive month of losses due mostly to tech-related stocks, according to people familiar with its results. Coatue is now down almost 11% for the year, and has given back more than half of its gains from 2013.
Hedge funds that bet on technology and health care as a group fell 3.7%, the steepest drop since 2008, according to HFR.
Jonathan Lennon, founder of hedge fund Pleasant Lake Partners, said it was challenging to navigate an environment in which many technology, media and telecommunications stocks are trading at "nosebleed valuations." He has maintained bets against technology and consumer stocks, which has helped $100 million Pleasant Lake gain about 12% this year.
The pain wasn't limited to tech stocks.
Paul Tudor Jones, a billionaire veteran of the industry and founder of Tudor Investment Corp., this week called the trading environment "as difficult as I've ever seen in my career." Mr. Jones' main fund is down about 4% this year, according to investor documents.
Sloane Robinson LLP, one of London's oldest hedge-fund firms, did even worse, recording a 20% yearly loss in its International fund. The fund has been hurt in part by bets against the Japanese yen, an investor said, a favorite hedge-fund trade from the past year that has hurt managers in 2014. Co-founder Hugh Sloan didn't respond to a request for comment.
But several boldfaced names in the industry shined.
William Ackman's Pershing Square L.P. hedge fund rose 7.3% last month, according to an investor update, helped by the activist's deal to back Valeant Pharmaceuticals International Inc.'s takeover attempt of wrinkle-treatment maker Allergan Inc.
Pershing Square L.P. is up 18.7% for the year through the end of April, according to the document viewed by The Wall Street Journal. The firm manages $13.7 billion overall.
Astenbeck Capital Management, the $3.4 billion commodities hedge-fund firm led by oil trader Andy Hall, gained 3.1% in April and is up more than 11% on the year, according to investor documents.
For some big firms, the problems arose when they switched gears at the wrong time. Quantitative Investment Management LLC, a $2.7 billion firm based in Charlottesville, Va., that frequently shifts its positions based on the firm's models, flipped to shorting U.S. equities early in the month, and began posting losses midmonth as stock indexes rallied, according to an investor communication.
Adding to the firm's pain: QIM had been betting for much of the month on further appreciation for U.S. Treasurys, a haven asset whose prices dropped as stocks rose. QIM's flagship fund ended the month down about 5%, and is now 6% in the red for 2014 overall.
For at least one big fund, staying the course turned out to be the right move.
Viking Global Investors LP, a $27 billion Greenwich, Conn. firm, was down almost 4% in the first two weeks of the month in its flagship fund, in part due to poor-performing bets on tech stocks, but told investors it intended to maintain its positions and ride out the turmoil.
After dropping 3.4% in the first two weeks of April, the Nasdaq-100 tech index roared back with a 4% return in the back half of the month. Viking ended up about 0.4% for April.