Credit Crunch Hurts Hedge-Fund Stars

WSJ: Credit Crunch Hurts Hedge-Fund Stars

David Tepper, founder of hedge-fund firm Appaloosa Management LP, saw a negative 17% return last quarter in two funds with more than $6 billion in assets combined as bets on distressed debt went awry, according to fund documents. His Appaloosa Investment and Palomino funds gave up most of that ground in January and February, as declining prices for mortgage-backed bonds and other debt investments caused broad credit-market seizures.

Some hedge-fund managers who have fared better this year are saying the wild ride in the markets isn’t over. “As we enter the second quarter, the volatility seen in past months does not appear to be in the process of disappearing soon,” wrote Philip Falcone, a former head of high-yield trading at Barclays Capital who runs $19 billion hedge-fund firm Harbinger Capital Partners, in a quarter-end letter to his investors. “Rising default rates, consumer struggles, weak labor markets and contraction in manufacturing/nonmanufacturing sectors continue to dampen the U.S. economy.” Harbinger posted returns of about 8% in its $15 billion Harbinger Capital Partners fund and 4.5% in its $4 billion Special Situations fund last quarter, according to client letters.

Another hedge-fund giant, John Paulson, whose Paulson & Co., of New York, oversees $32 billion, once again is taking advantage of credit turmoil, with a 10% rise at its Credit Opportunities funds in the first quarter, according to fund documents. Mr. Paulson personally profited to the tune of an estimated $3 billion last year on bets correctly forecasting the housing-market plunge.

Some hedge-fund managers’ troubles have mounted this year as banks tightened standards for buyers of risky assets such as securities backed by subprime mortgages to people with poor credit. Margin calls, or demands for increased assets or cash as collateral for loans, have caught some hedge funds short, causing them to unload assets and sparking a broader sell-off of securities and price declines in more highly rated assets.

As the dominoes fell, London hedge fund Peloton Partners LLP imploded in late February. But Appaloosa, for one, stabilized somewhat, with its two funds down 3.4% for March. The troubles of others, though, were gaining momentum.

John Meriwether’s JWM Partners LLC, of Greenwich, Conn., had a negative 31% first-quarter return in his Relative Value Opportunity Fund, the firm’s biggest. It included a decline of more than 20% in March alone, according to a fund document. The bond portfolio, which started the year with more than $1.2 billion, was hammered by investments in Japanese government securities. Mr. Meriwether, 60, is perhaps best known as a founder of Long-Term Capital Management, the hedge fund whose loss of $4 billion in 1998 threatened a global financial crisis.

Hedge funds world-wide across all investment styles posted losses of 2.8% on average, after fees, last quarter, according to Hedge Fund Research, the Chicago firm that tracks fund performance. Most relative-value managers and those who specialize in fixed-income trading finished the quarter down 2.6% to 6%, on average, depending on their focus.