Hedge funds climb in 3rd qtr but still lag stock market

Fri Oct 5, 2012 10:05am EDT

* Hedge funds up 2.6 pct in 3rd qtr, up 5.1 pct year to date

* Stock funds best performing strategy in September

* Credit funds best performing strategy for year to date

By Katya Wachtel and Svea Herbst-Bayliss

NEW YORK, Oct 5 (Reuters) - Hedge funds climbed 2.6 percent in the third quarter, buoyed by rallying global stock markets, and some of the industry's most famous investors saw their portfolios leap into double-digit return territory.

Hedge funds, on average, gained 0.8 percent in September, according to fund tracker eVestment|HFN, and the strong quarter helped year-to-date returns for the industry reach 5.1 percent.

But those gains still trailed the S&P 500 stock index, which added 2.25 percent in September and was up 16.43 percent for the year.

"Steps taken in the euro zone to alleviate near-term crisis concerns, along with the, ultimately realized, expectations for more quantitative easing from the Federal Reserve," helped boost hedge fund returns in the quarter, said Peter Laurelli, head of industry research for eVestment|HFN. "However, it appears these same factors led macro and managed futures to underperform."

Some of the industry's best known names posted stronger performance than the average hedge fund in the third quarter.

Daniel Loeb's flagship hedge fund, the $4.7 billion Third Point Offshore Fund, is up 10.9 percent for the year after gaining 3.4 percent in September, according to an investor note reviewed by Reuters.

The $6 billion hedge fund Tiger Global, run by Chase Coleman and Feroz Dewan, is up 22.4 percent for the year after rising 1.5 percent last month, according to two people familiar with the fund who were not authorized to speak on its behalf.

Funds like Coleman's that focus on investing in stocks were the best performing strategy in September, eVestment|HFN data showed, gaining 1.34 percent, pushing yearly returns to 5.8 percent. Stock-focused funds battled to generate gains in 2011 as whipsawing global markets tripped up investors and sent their portfolios into a tailspin, losing 6.5 percent on average.

Credit-focused funds have been 2012's best performing strategy and continued their dominance in the third quarter, adding 3.8 percent.

For the year, credit funds are up 8.7 percent, many boosted by big, successful bets in the mortgage-backed securities and "junk" bond markets. Some credit managers are moving into more complex structured trades such as collateralized loan obligations to help boost returns.

The combination of strong performance with new investor flows sent total credit fund capital to an all-time high through August, with almost $758 billion in assets, eVestment|HFN said.

Fixed income/credit funds were the only strategy to take in new flows in the three months to Aug. 30 and have taken the lion's share of new capital this year, data showed. Equity, commodity and multi-asset funds all experienced net withdrawals in the three months through August.

Managed futures funds put in the worst performance in September, down 0.5 percent. Both macro and managed futures funds lagged other strategies for the year to date, up 2.43 percent and 0.97 percent, respectively.

"Though they are a diverse group, it appears the aggregate exposures are being hurt by the strengthening euro and the equity market rally of the last two months, indicating the group, on an aggregate basis, may be positioned defensively," eVestment|HFN said.

Not all macro funds have struggled to punch out double-digit returns. Fortress Investment Group's flagship macro fund rose 3.58 percent in September, pushing year-to-date returns to more than 11 percent, a regulatory filing showed. The asset manager's Asia Macro Fund is up 10.66 percent for the year.

The biggest hedge funds, which eVestment|HFN categorizes as firms with more than $1 billion under management, once again trumped smaller firms during the third quarter.

Och-Ziff Capital Management, which like Fortress is one of a handful of publicly traded asset managers, said its Och Ziff Master Fund was up 1.09 pct in September, leaving it up 8.2 percent year to date.

Pershing Square, William Ackman's $10 billon hedge fund, lost 0.5 percent in September but gained 4 percent over the third quarter. His fund is up 9 percent year to date, according to someone with knowledge of the returns.

Marcato Capital Management, a $750 million hedge fund run by one of Ackman's former partners, Mick McGuire, bucked the trend of smaller managers lagging the behemoths. That fund rose 2 percent in September and is up 22.4 percent year to date, said a person familiar with the numbers.

Despite strong returns in emerging market funds, which have gained 7.8 percent this year through September, investors still yanked $4.9 billion from the strategy in the first two months of the quarter, eVestment|HFN said.

Funds that specialize in investing in Brazil have also had a good run, up 8.63 percent for the year after gaining 4.3 percent in the third quarter, the data showed.

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