January 19, 2016 / 12:07 PM / in 3 years

Caution, teamwork trumped bravado for some hedge funds in 2015

NEW YORK (Reuters) - In a disappointing year for hedge funds, a few big winners shared a perhaps surprising trait: actually hedging.

Funds who placed a broad array of bets produced some of the strongest gains, beating star managers like Bill Ackman, David Einhorn and Larry Robbins who invested more narrowly and ended 2015 with steep losses.

Those who took a more conservative approach - often using large teams to further diversify investments - posted some of the strongest gains. Funds to produce double-digit returns in 2015 include Citadel, Millennium Management, Visium Asset Management, Tourbillon Capital Partners and Blackstone Group’s Senfina Advisors, according to private performance information seen by Reuters.

Those increases came during a year when the average hedge fund, as represented by the Absolute Return Composite Index, fell 0.13 percent.

The S&P 500 Index gained 1.4 percent, with dividends, but many investors were burned during a volatile year that included a rout in the junk bonds of energy companies, plummeting healthcare stocks, and market gyrations pushed by fears of a Chinese economic slowdown.

Those that beat the odds and won in 2015 underscore the types of hedge funds large risk-adverse investors such as pensions and endowments are flocking to.

The firms usually take a neutral approach to the market’s ups and downs, spreading out their bets and avoiding large wagers on any one idea or theme.

“Having the discipline to stay hedged,” said Matt Litwin, director of research at investment adviser Greycourt & Co., “paid off in a big way.”

TEAMWORK WINS

Hedge funds known for their big teams scored in 2015.

A prime example is Millennium Management, the $34 billion firm led by Brooklyn-born Israel “Izzy” Englander. Its main Millennium International fund gained 12.65 percent for the year, according to performance information seen by Reuters.

Millennium’s hallmark is a sea of different investments, including thousands of bets on stocks alone. The New York-based firm employs more than 1,800 people and 180 trading teams, making its staff among the largest in the world for hedge fund.

Millennium’s volume of investments are managed for risk by a separate team of employees and the portfolio is market-neutral, meaning the value of the bets on securities appreciating in value, so called longs, are equally balanced with those on them declining, so-called shorts.

Citadel, the $25 billion fund manager led by billionaire Ken Griffin, gained 14.3 percent over 2015 in its main multi-strategy hedge funds, according to a person familiar with the returns.

Citadel’s funds, backed by a 700-person investment team, invest in stocks, bonds, commodities, macroeconomic trends and more. Each category was profitable for the year, according to the person. The firm’s equity-focused hedge funds also gained 17.2 percent, according to the person. Both types of funds run at or near market neutral, meaning they likely benefited substantially from bets against stocks and other securities.

Other winning multi-manager, market neutral firms, according to figures seen by Reuters, include Blackstone’s Senfina, the new, nearly $2 billion unit that gained 23 percent between January and November; Jacob Gottlieb’s $8 billion Visium, whose Global Fund gained 10.3 percent in 2015; Ari Glass’ $190 million Boothbay Fund Management, whose main fund gained an estimated 10.15 percent for the year; and Dmitry Balyasny’s $8.1 billion Balyasny Asset Management, whose Atlas Enhanced Fund gained about 5.9 percent in 2015.

To be sure, such funds can lose money, even if they aggressively attempt to manage risk, because they often use leverage, or borrowed money, to increase the size of their bets.

The Absolute Return Multi-Strategy Index fell nearly 10 percent in 2008. It was the only down year for the hedge fund strategy since tracking began in 1998; last year, the average gain was 2.25 percent.

BETTING BOTH WAYS

Other funds with more centralized investment management also did well by spreading their bets, especially shorting stocks.

Eton Park Capital Management, led by Eric Mindich, formerly of Goldman Sachs, gained 7.5 percent for the year in its main fund. The $9 billion firm’s bets on Japan, derivatives and stocks, both long and short, drove the returns, according to a person familiar with the situation.

Tourbillon, led by SAC Capital Advisors and Carlson Capital veteran Jason Karp, gained about 11 percent over 2015, according to a person familiar with the situation. The approximately $4 billion firm rose on both long and short bets on stocks, according to the person. They included winning bets on travel business Expedia rising and a wager on biopharmaceutical company MannKind Corp. falling.

And Anson Group, the $500 million firm based in Dallas and Toronto, scored a 16.2 percent gain last year in its main hedge fund, according to a person familiar with the situation.

The performance was driven by many small stock picks, especially bets on their decline, the person said. The fund is managed by Bruce Winson, Moez Kassam and Adam Spears.

All three firms run portfolios that are at or close to market neutral. Firms contacted for this story did not respond to requests for comment or would not speak on the record.

Reporting by Lawrence Delevingne; Editing by Alan Crosby

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