NEW YORK (CNNfn) - While Nasdaq volatility toppled two hedge fund leaders and raised questions about the health of the industry, certain hedge funds have actually been thriving during the market's drastic swings.|
Hedge funds that short-sell stocks or time the market have in some cases delivered double-digit returns in April -- even as Julian Robertson and George Soros, pillars in the hedge fund community, decided to shut down or cut back on risky strategies.
Many industry hedge fund indexes expect to report their monthly numbers next week. But in advance of those figures, analysts say hedge fund short sellers were some of the top performers last month thanks to the market's roller coaster ride that took the Nasdaq down more than 25 percent in mid-April.
"We were, so to speak, dancing in the aisles," said Brian Rogers of Short Alpha Bear Management, a short selling hedge fund in New York City. "The volatility provides us opportunity. When things get more out of whack, we can profit from it."
Hedge funds, which are unregulated pools of money, use riskier strategies than mutual funds -- such as derivatives and short selling -- to boost returns. By leveraging their investments, hedge funds can boast substantial returns.
Hedge funds require substantial minimum investments that can range from $250,000 to $1 million. Typical shareholders are foundations, pension funds, university endowments and wealthy investors. Short Alpha Bear Management, for example, which manages about $15 million in hedge fund assets, markets itself only to institutions with a minimum investment of $1 million.
Short is sweet
While some strategies such as Soros' macro-style Quantum Fund and Robertson's value-oriented fleet of funds are not faring well, short sellers who bet that a stock price will fall were able to capitalize on market gyrations.
"If short sellers didn't make money (in April), then I don't know what they were doing," said Meredith Jones, director of research at Van Hedge Fund Advisors International Inc. in Nashville, Tenn.
Rogers, portfolio manager of the Short Alpha Bear Fund, reported a 36.93 percent return for April. His portfolio consists mostly of large-cap stocks, but the key to his recent success is buying "distressed" stocks - - companies that fall short of earnings expectations, report cash flow problems or other negative news.
"We go in after the news, after a catalyst has been announced," said Rogers who declined to name any of the fund's holdings. He borrows a stock, hopes that it will fall, and buys it later at a cheaper price to make a profit on the difference. Year to date, the fund is up 72.06 percent, according to Hedgefund.net.
Bets to go down
While Short Alpha Bear is riding the wave of volatility now, it had a tough go of it in 1999 as the Nasdaq was up 86 percent for the year. In fact, short selling hedge funds in general were down 23.7 percent in 1999, according to Van Hedge Fund Advisors Index.
But Rogers, who started the fund in July 1999, thinks his short-selling strategy is well poised with the market, which he expects to go down.
"We've seen basically a 20-year bull market which is the longest this country has seen," he said. "Usually a bull market lasts 15 to 18 years, so I think we're due for sideways to downward action."
Market volatility also played into the hands of Michael Sapourn, who manages about $85 million in hedge fund assets in Bethesda, Md.
Sapourn, a market timer who tries to take advantage of daily market movements, is either fully invested in securities when the market is up, or in cash, such as money market funds, when the market is moving down.
"Market timers did well because they avoid a lot of the downdrafts of the market," he said. Sapourn said his two domestic hedge funds returned up to 2.5 percent for April. "We're 100 percent invested in money market funds in big down days based on our signals," he said.
On Wednesday, for example, as investors were dumping technology stocks sending the Nasdaq down, Sapourn said his market-timing model gave him the red flag to stay out of the market.
Hedge fund pillars take a dive
While hedge funds can deliver big returns, the losses can be just as striking, like in the case of Soros' flagship Quantum Fund, which has plunged 22 percent this year.
Last week, Soros Fund Management, the world's largest hedge fund, announced a revamping of the Quantum Fund amid steep losses in technology stocks and the departure of two top managers.
Soros' news came on the heels of Wall Street veteran Julian Robertson's announcement that he was liquidating his funds and closing the doors on Tiger Management. Robertson's bets on value stocks backfired as investors turned their attention to high-octane technology shares.
Some in the industry say the downfall of these prominent hedge fund participants shows how difficult it is for managers to navigate market waters while running huge funds. Soros manages around $12 billion in hedge fund assets.
"Rather than be some sort of revolution, it's more of an evolution for the hedge fund industry, which is increasingly being taken over by the new guard," said Barry Colvin, director of research at Tremont Advisors in Rye, N.Y.
"It's just a tough, tough market to make money in," said Michael Ocrant, editor of MAR-Hedge newsletter. "You almost have to be a sage to come out on top in a market like that. It's sort of like everybody is treated equally bad."
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