Whale Watch: Q1 2013

By Lawrence Delevingne, Rob Copeland

Tue Apr 16, 2013

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Absolute Return's inaugural look at what the five largest American hedge fund firms did during the past quarter: Bridgewater, J.P. Morgan, Och-Ziff, Baupost, BlackRock.

  A Bridgewater management committee meeting in 2011 (Photo: Michael Edwards)

1. Bridgewater Associates

Bridgewater Associates started 2013 with more assets than ever-- $83 billion in hedge funds alone and $130 billion overall--but its recent middling performance has continued. Its flagship macro hedge fund, Bridgewater Pure Alpha Trading Company II, is down 0.93% through March following a virtually flat 2012 (up 0.80%; full data here). The firm managed $84.3 in hedge fund assets as of March 31.

That performance is in spite of a generally correct bullish call early in the year. In January, founder Ray Dalio told CNBC's Andrew Ross Sorkin in Davos that investors were likely to move money out of cash and into "stuff" in 2013, including such higher-return, riskier investments as goods, services and "financial assets" like equities and gold. "2013 will likely be a transition year," Dalio said. In February, co-chief investment officer Bob Prince expanded on that thesis, saying Bridgewater was bullish on stocks, oil, commodities and some currencies, according to Bloomberg.

Dalio's largest publicly disclosed holdings at the beginning of the year were the Vanguard MSCI Emerging Markets ETF (more than $3 billion), an S&P 500 ETF ($2.8 billion), and iShares MSCI Emerging Markets Index ($2.5 billion).

Despite Bridgewater's recent mediocre performance, the firm's long-term record of success--13.81% net annualized returns since inception for Pure Alpha II--continues to earn it accolades. Besides being the largest hedge fund firm in the world, Bridgewater recently received the top honor in the first Investments & Pensions Europe Pension Fund Perception Program and placed second in Institutional Investor's Alpha's Hedge Fund Report Card survey.

Bridgewater also made a senior hire last month: Mike Terry, the former global head of capital introductions at Bank of America Merrill Lynch, left the bank in March to join as Dalio's firm as a client adviser. (LD)

2. J.P. Morgan Asset Management

J.P. Morgan's large, international stable of hedge fund offerings again ranked second largest in the Americas to begin 2013 at $44 billion under management.

The bank's largest hedge fund division, $29 billion Highbridge Capital Management, has produced solid but unspectacular returns so far this year, according to the following figures from an HSBC report. The flagship multistrategy $4.9 billion Highbridge Capital Corporation fund is up 2.14% through March after rising 9.79% in 2012. The much smaller Highbridge Long/Short Equity Fund is up 3.75% through March, but the Highbridge Quantitative Commodities Fund is down 5.39% through February and the Highbridge Statistical Opportunities Fund is down 2.04% through March.

Highbridge co-founder Glenn Dubin began the year bullish on equities. "I see big opportunities in long/short equities," he said at Morgan Stanley's Breakers conference in late January, adding that the biggest market trends today were capital moving out of public credit and into equities; and direct lending and mezzanine financing. Dubin said the biggest risk ahead was "the inevitability of rates rising...inflation is one risk that could unsettle global markets."

Gavea Investimentos, J.P. Morgan's $7.3 billion Brazilian alternative investment firm run by Arminio Fraga, is also up so far this year. The flagship macro Gavea Fund is up 3.73% through March, according to the Absolute Return database. The smaller multistrategy fund, Gavea Plus FIC de FIM, is up 5.03% through March. In February, Gavea scrapped its plans for a high-yield credit fund and returned the more than $500 million it had raised from investors because its head of private credit, Jose de Menezes Berenguer Neto, left to lead J.P. Morgan's Brazilian unit, according to Bloomberg.

The $582 million JPS Credit Opportunities Fund is up 1.34% through March, according to HSBC. The European equity focused J.P. Morgan Europe Dynamic Long Short Fund is up 5.11% through March 29, according to HSBC. The fund managed $476 million as of January and was launched in May 2012. The J.P. Morgan Euro Managed Currency Plus Fund is up 8.65% through March, according to the Absolute Return database.

Overall, J.P. Morgan is bullish on hedge funds. Robert Klein, J.P. Morgan's global head of hedge fund strategies, said in a February outlook piece that there were "abundant opportunities" for hedge funds, especially those running long/short equity, multistrategy, reinsurance, shareholder activism and emerging market strategies. "We believe today's environment for hedge funds is especially promising," Klein wrote. (LD)

  Dan Och (Photo: Bloomberg)

3. Och-Ziff Capital Management Group

Publically traded multistrategy behemoth Och-Ziff Capital Management Group started the year as the third largest American hedge fund firm, running $31.9 billion. That figure has already grown to $34.9 billion as of April 1.

The firm's relatively bullish economic view has led to gains through March of 3.95% in the OZ Master Fund, 3.81% in the OZ Europe Master Fund and 5.60% in the OZ Asia Master Fund, according to a public filing.

"We ended the year fully invested in the OZ Master Fund and although we remain cautious as macroeconomic and political uncertainties persist, we believe the current environment will play to the strengths of our multi-strategy investment approach," wrote founder Dan Och in the firm's yearend report released April 3. "In particular, we see compelling opportunities in event-driven investments and global long/short equity special situations. We also believe that we are well positioned in our credit strategies to take advantage of the deleveraging process that continues among financial institutions globally."

The firm suffered a big personnel loss in March, announcing that its longtime head of European investing, Michael Cohen, resigned from the firm after 15 years. David Windreich, head of U.S. investing, took over Cohen's responsibilities.

Och-Ziff also named James Levin head of global credit during the first quarter, a move hinted at during the firm's first quarter earnings call February 7. "We think we have substantial room for growth on the credit side, so I think it's reasonable to assume that we'll be adding personnel in that area," said chief financial officer Joel Frank. The credit team led by Levin, who is just 30, made Och-Ziff nearly $2 billion in 2012, as noted by The Wall Street Journal.

In January, Och was dismissive of the notion that hedge fund returns decline with scale. "We've been hearing that question since we went over $1 billion...no large investor has ever said to us 'we don't need a lot of return, just be safe,'" Och said at the Morgan Stanley Breakers conference. "We don't come to work to be mediocre."

One of the small number of publicly-listed hedge fund firms, Och-Ziff's stock (OZM) did not reflect the success of its funds in the first quarter, falling 1.58%. That was a slight retreat from a very successful run in 2012, during which the stock rose nearly 13%. The stock has already rebounded in April and is up 3.16% for the year through April 16. (LD)

4. Baupost Group

Seth Klarman's $26.7 billion Baupost Group entered the year crowing of an "acceptable" reportedly 7.6% consolidated gain across its funds in 2012, well below the 12.60% gain of the Absolute Return Distressed Index.

Major stock positions for the value shop entering this year included oil powerhouse BP, satellite networker ViaSat, software maker Oracle Corp and Class B shares in Rupert Murdoch's media conglomerate News Corp, filings indicate. ViaSat and News Corp. are up big for the year, while BP is down and Oracle is about flat.

Real estate has also been a focus for the Boston-based firm. Baupost senior advisor Samuel Plimpton reportedly said last month that the firm would consider investments in American or Western European hotels with financing troubles or furnishing/design deficiencies. Separately, the Wall Street Journal reported that Baupost was the source of a "big piece" of the $42 million in equity needed to build a luxury apartment complex in the Murray Hill neighborhood of Manhattan.

Klarman also found himself on the defensive from a far higher-profile manager: Bill Ackman of Pershing Square Capital Management. WSJ unearthed remarks from Ackman at a 2011 conference saying his own investment process was as dynamic as a blowtorch, which Klarman's was more comparable to a hairdryer.

Klarman "took absolutely no offense to the remark and, in fact, found it amusing," a spokeswoman found herself responding two years later. (RC)

5. BlackRock

At global asset manager BlackRock, single manager hedge funds are practically an afterthought, with the $26.6 billion in total comprising less than 1% of the company's trillions worldwide. Inside the universe of the Absolute Return Billion Dollar Club, however, BlackRock is ranked fifth, significantly larger than some firms that have gotten significantly more ink lately, such as Renaissance Technologies, Elliott Management Corp. and the D. E. Shaw Group.

The relative anonymity isn't due to muted returns. BlackRock's $4 billion Fixed Income Global Alpha fund won the EuroHedge award for Global Fixed Income funds in 2012 for a gain of 14.26%. Gains for many of the firm's funds have remained positive in the first quarter of this year. The aforementioned credit fund is up 2.54% in the first quarter, according to figures from HSBC Private Bank, well ahead of the EuroHedge Fixed Income Index. The market neutral 32 Capital Master fund gained 2.09%, a little behind the Absolute Return Composite. The nearly $1 billion Obsidian credit arbitrage fund returned 3.25%, slightly ahead of the Absolute Return Credit Index.

All of the these funds--and, indeed, the vast majority of BlackRock strategies with terms listed in the HedgeFund Intelligence database--charge less than 1.5% as a management fee, making them cheaper than the industry norm (the funds collect 20% of performance gains).

There have been several management changes during the past quarter. Andy Stewart, once head of liquid alternatives for Credit Suisse, joined the firm as co-head of BlackRock Alternative Investors and chief investment officer for alternatives. Ex-Swiss Re CIO David Blumer joined to oversee Europe, the Middle East and Africa. (RC)

ISSN: 2151-1845 / CDC10004H

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