Volatile Waters Tossed Around Hedge Funds

Volatile Waters Tossed Around Hedge Funds
First Quarter Proved Tough for Stock Pickers; Long/Shorts Off 5.8%

By JENNY STRASBURG and CASSELL BRYAN-LOW
April 10, 2008; Page C1

Stock picker Charles Jobson has sailed through past bear-market tempests, quietly amassing $2.4 billion in assets and reinvesting millions of dollars in personal profit into his Boston hedge funds.
The recent stock-market turbulence has turned out to be the test of his career.
His biggest funds, called Prism, which started the quarter with assets of more than $2 billion, had losses of 24% to 29% last quarter, letters to clients show. The declines, partly from money-losing bets on student-loan company First Marblehead Corp., leave Mr. Jobson, 48 years old, with quite a hole to plug, and some investors are antsy to leave his firm, Delta Partners LLC, for safer havens.
Mr. Jobson, who has an impressive track record, is far from alone in getting caught up in the turbulence. Credit-market unrest and stock volatility have hurt big funds managed by such names as Farallon Capital Management LLC, the $36 billion San Francisco hedge-fund firm, and Ivy Asset Management of New York, which has $15 billion in client money farmed out to hedge funds.
Managers who focus their bets on rising and falling stocks collectively had their worst quarter since 2001, sliding an average of 5.8%, according to Hedge Fund Research, the Chicago firm that tracks industry performance.
Moreover, these so-called long/short stock pickers, who control more assets than any other strategy, fared worse overall than their peers. Hedge funds world-wide across all investment styles posted losses of 2.8% on average, after fees, last quarter.
The numbers didn't look so bad next to many of the major indexes, including the Standard & Poor's 500-stock index, which fell 9.9% last quarter. It dropped as unprecedented credit-market turmoil and the March collapse of Bear Stearns Cos., which is being acquired by J.P. Morgan Chase & Co., triggered selloffs. Then financial shares rebounded on aggressive interest-rate cuts and other stabilizing moves by the Federal Reserve.
But the quarter's finish-line numbers don't tell the whole story. "To market participants [March] was an 'all hands on deck' thrill ride," Mark Yusko, who runs Morgan Creek Capital Management, wrote this week in a letter to clients of the firm, which allocates client money to hedge funds. The Fed's actions caught many managers off-guard, he said.
For fund managers, timing short sales has been especially tricky lately. In a short sale, a manager borrows shares hoping the price will fall so he can replace them with cheaper shares.
"How well a manager fared in March depended largely on their ability to cover in financial shorts," says Ray Nolte, who heads up the hedge-fund management group at Citi Alternative Investments.
Not all managers were caught off-guard. London's Horseman Capital Management Ltd., which oversees a total of $4.4 billion, posted a rise of 11.5% at its flagship global stock fund in the first quarter, swelling that fund's assets to about $3 billion. Manager John Horseman, 50, also did well in his smaller European Select Fund, which rose almost 10% for the quarter.
Bay Resource Partners, an Atlanta hedge fund managed by GMT Capital Corp. with $3.6 billion of assets in the long-short strategy, had its first negative quarter since 2003. But the loss was just 0.9%, according to a client letter proclaiming March a month that "nearly defies description." GMT's wagers against energy and retail helped offset bets on media and energy.
Famed Boston stock picker James Pallotta, who oversees the $6 billion Raptor hedge fund for Tudor Investment Corp., has played the markets well in recent weeks. He finished the quarter down about 3.7%, after being down more than 5% in mid-March, according to an investor. Mr. Pallotta is reaching for a comeback after a 2007 loss drove Raptor clients to withdraw more than $1 billion.
Elsewhere, Farallon has had losses of about 6% and 10% this year in two of its biggest funds, which have about $18 billion in combined assets, according to investors. And Ivy's nearly dozen funds that allocate money to long-short managers are all negative, with first-quarter returns ranging from a negative 2.5% to a negative 10%. The Ivy Rising Stars funds were down about 9%, according to fund documents.
Mr. Jobson, who declined through an associate to comment, sought last week to reassure investors in his Prism strategy.
The quarter was "the most difficult period in its history," he wrote, adding that the firm "will navigate through this trying and difficult period."