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> July 30 (Bloomberg) -- Shawn Bergerson, founder of Waterstone
> Capital Management LP, made money when most hedge funds didn’t: in
> 2007 and 2008, as the housing-market collapse turned into a global
> financial rout, and in the recovery that has followed.
>
> Bergerson said he bet against convertible bonds of Advanced Micro
> Devices Inc. in June 2007. More than a year later, he reversed
> course and bought the securities. After riding the rebound by
> markets in 2009, he’s wagering against consumer- related stocks
> because he sees Americans curtailing spending and reducing debt amid
> high unemployment.
>
> “While I’m not expecting a major economic crisis or a disaster, the
> consumer is in a weak position,” Bergerson, 45, said in a telephone
> interview from his office in Plymouth, Minnesota, where he oversees
> $1.17 billion.
>
> He’s one of a small minority of hedge-fund managers, including Alan
> Howard andColm O’Shea, who haven’t had a losing year since 2007 as
> they navigated the credit-market freeze, Lehman Brothers Holdings
> Inc.’s bankruptcy, the biggest stock- market rally in six years and
> the uncertainty over the direction of the global economy that has
> marked 2010. It’s a feat that eluded investors with top long-term
> returns, such as Steven A. Cohen, Louis Bacon and Ken Griffin, who
> each posted the worst losses of their careers in 2008, as well as
> almost 3,300 hedge funds that have shut since the start of 2007.
>
> Economy Losing Momentum
>
> In interviews and investor letters, managers who dodged the
> financial crisis said they expect the U.S. and European economies to
> slow. David Gerstenhaber of the Argonaut Macro Partnership fund and
> Xerion fund’s Daniel Arbess favor investments tied to emerging
> markets. O’Shea, who runs COMAC Capital LLP, andLaurence Benedict of
> Banyan Equity Management LLC said they have reduced the size of
> their investments because it’s hard to know how markets will behave.
>
> Gerstenhaber is planning to bet against industries that do poorly
> when the economy loses steam, such as materials, energy and
> homebuilders.
>
> “Our expectation is that we will continue to see downward revisions
> to growth forecasts in advanced economies,” Gerstenhaber, 49, said
> in a telephone interview. The $1 billion Argonaut Macro returned a
> cumulative 48 percent from the start of 2007 through June 2010.
>
> Gerstenhaber, who founded New York-based Argonaut Capital Management
> in 1993, said he’s keeping his long position in China’s yuan, an
> investment he’s had for more than a year that will profit if the
> currency rises.
>
> Emerging-Markets Faith
>
> “A small number of emerging markets can decouple, particularly those
> that are able to generate strong domestic demand such as China,
> India, Brazil and Indonesia,” Gerstenhaber said.
>
> While slowing U.S. and European economies may trim growth in
> emerging markets, New York-based Arbess said he’s investing in
> companies that benefit from demand in developing countries.
>
> “I believe in the resiliency of the emerging markets,” he said in an
> interview. “They have the balance-sheet strength to continue funding
> their development, whereas we in the West are over-stretched.”
>
> Arbess, 49, a partner at Perella Weinberg Partners LP, said he was
> betting against “over-leveraged entities” in European and Group of
> Seven nations, declining to identify the securities he was using to
> execute the trades. His $2.1 billion Xerion fund returned 95 percent
> from the start of 2007 through May 2010.
>
> Opposing View
>
> Scott Ramsey, founder of Denali Asset Management, which has $206
> million in assets, doesn’t see emerging markets bailing out the U.S.
> or Europe.
>
> “It’s hard for me to believe that the rest of the world has enough
> aggregate demand to offset the sluggish U.S. and euro zone,” said
> Ramsey, whose Denali Partners fund returned 45 percent in the 3 1/2
> years through June 2010.
>
> The $1.65 trillion hedge-fund industry, after posting its worst
> second-quarter performance in a decade, is taking less risk, using
> less debt and making fewer trades, according to data from securities
> exchanges and brokers including Credit Suisse Group AG and JPMorgan
> Chase & Co.
>
> Hedge-fund clients of Zurich-based Credit Suisse held 24 percent of
> their assets in cash in June, compared with 19 percent three months
> earlier. Daily trading volume for the Standard & Poor’s 500 Index of
> the largest U.S. companies averaged 1.09 billion shares in June, 20
> percent less than in May.
>
> ‘Schizophrenic’ Market
>
> U.S. stock-market volatility as measured by the Chicago Board
> Options Exchange Volatility Index tripled in May from April as
> equities plunged on concern that European leaders couldn’t control
> the region’s debt crisis. The VIX measures prices paid for S&P 500
> index options.
>
> “The markets have been schizophrenic,” Ramsey said.
>
> Ramsey, 52, said he expects stocks to decline this quarter as a U.S.
> unemployment rate of 9.5 percent and austerity measures in Europe
> curb consumer demand.
>
> “Based on current policy, what have been fiscal tailwinds are now
> fiscal headwinds,” he said in a telephone interview from his office
> in Christiansted, Virgin Islands. “Private payrolls need to increase
> and we need to get a lot more of the 8 million lost jobs back.”
>
> Ramsey, like many of the managers that fared well from 2007, runs a
> macro fund, which seeks to profit from broad economic trends by
> trading stocks, commodities and currencies. He holds his trades for
> an average of a week. The HFRI Macro Index climbed 20 percent from
> January 2007 through June 2010.
>
> O’Shea Pessimistic
>
> O’Shea, whose London-based hedge-fund firm oversees $5.9 billion,
> shares Ramsey’s pessimism.
>
> The budget crisis faced by state and local governments in the U.S.
> is likely to hamper the nation’s growth, O’Shea said.
>
> To balance budgets, state and local governments may have to fire
> workers, which will increase unemployment rates and have
> “significant knock-on effects to aggregate demand,” O’Shea, 40, said
> in an investor letter this month. O’Shea’s COMAC Global Macro fund
> has returned 73 percent since the start of 2007.
>
> O’Shea also said that were “medium-term downside risks” to growth
> and inflation in Europe as monetary and fiscal policies were
> becoming “less supportive.” He didn’t list his trades in the letter.
>
> Waterstone’s Bergerson, who started the Waterstone Market Neutral
> Master Fund in 2000, mainly invests in convertible bonds, securities
> that can be converted into shares at a preset price, as well as
> corporate bonds and equities. The fund returned 84 percent from the
> start of 2007 through June this year, according to an investor letter.
>
> Industry Returns
>
> It’s one of 321 hedge funds that were agile enough to make money for
> investors every year since the onset of the financial crisis in
> 2007, according to data compiled on 2,799 funds by PerTrac Financial
> Solutions, a New York-based investment- software company.
>
> The hedge-fund industry on average returned a cumulative 6.6 percent
> in the 3 1/2 years through June, according to Chicago-based Hedge
> Fund Research Inc. The S&P 500 lost 22 percent in the period. U.S.
> Treasuries returned 27 percent, according to Bank of America Merrill
> Lynch index data.
>
> Hedge funds gained an average 10 percent for investors in 2007, lost
> a record 19 percent in 2008 before rebounding 20 percent last year,
> according to Hedge Fund Research. The industry has lost 0.21 percent
> this year through June.
>
> What Worked
>
> The winning-streak managers made money through a combination of
> prescient investment calls, having smaller trades for shorter
> periods of time, which enabled them to get out of unprofitable
> positions sooner, and raising cash before markets slumped in the
> second half of 2008.
>
> Perella’s Arbess started shorting, or betting against,
> collateralized-debt obligations tied to subprime mortgages at the
> end of 2006. Howard, 46, co-founder of London-based Brevan Howard
> Asset Management LLP, raised cash in February 2008 in anticipation
> that the housing collapse in Europe and the U.S. would cause credit
> markets to seize. Gerstenhaber bet in the middle of 2008 that
> European interest rates would fall and in September of that year
> shorted the euro.
>
> Benedict, founder of $804 million Banyan Equity Management in Boca
> Raton, Florida, said he’s reduced the size of his trades to about a
> third of what they usually are, and to the lowest since October
> 2008, because of uncertainty over the economy.
>
> “It’s difficult to get conviction in this environment,” said
> Benedict, 48, who holds trades for no longer than five days and
> whose Banyan Capital fund returned 56 percent since the start of
> 2007 through June this year.
>
> “There will be more clarity by the third quarter following the
> release of economic indicators.”
>
> Below is a list of some of the hedge funds that profited each year
> since 2007. Brevan Howard, COMAC, Denali, Galena, Brownstone,
> Argonaut, King Street and BlueCrest have made money in every year
> since they started.
>
>
> Hedge Fund YTD* 2009 2008 2007 TOTAL
> RETURN**
>
> Rubicon Global 15.2 14.9 44.8 6.8 105
> Perella Xerion*** 3.4 35.3 0.3 38.8 95
> Bluecrest Capital 9.3 45.4 6.3 10.8 87
> Waterstone 2.4 49.3 12.1 7.5 84
> Brevan Master 1.5 18.7 20.4 25.2 82
> COMAC Global Macro 4.1 14.9 30.7 10.7 73
> EMF Fixed Income 0.8 11.2 22.0 16.6 59
> Banyan Capital 5.1 11.5 14.4 16.5 56
> Capula Relative Value 6.7 12.3 9.6 18.0 55
> Galena 6.3 12.7 21.6 2.9 50
> Argonaut 1.5 10.1 12.3 18.1 48
> King Street Capital 1.4 20.1 2.5 17.3 46
> Denali Partners 9.6 4.2 19.2 6.7 45
> Caxton Global 4.0 6.2 12.9 1.1 26
> Brownstone Catalyst 0.6 7.5 7.0 6.8 23
>
> *through June 2010
> **total=cumulative return from January 2007 to June 2010
> ***YTD and total through May 2010
>
> Source: investors
> To contact the reporter on this story: Saijel Kishan in New York atskishan@bloomberg.net
>
> Last Updated: July 30, 2010 00:00 EDT