Hedge Funds Rose 3.2% in October on Stock, Debt Bets (Update2)

By Jenny Strasburg and Katherine Burton


Nov. 7 (Bloomberg) -- Hedge funds returned an average of 3.2 percent in October, the biggest gain in almost two years, as rising stocks and bets against mortgage-backed securities helped firms including Pequot Capital Management Inc. and Passport Management LLC.

Pequot's $1 billion Core Global stock funds rose 3.4 percent last month and 37 percent for the year, according to an investor letter from the Westport, Connecticut-based firm. San Francisco-based Passport's Global Master Fund, with about $2.2 billion, has almost tripled this year after increasing 34 percent in October on profits from subprime mortgages and mining companies.

The average return year-to-date is 12.3 percent, according to a report today from Chicago-based Hedge Fund Research Inc. Managers who bet on rising and falling stock prices climbed 3.5 percent. They benefited when the Federal Reserve cut the federal funds rate by a greater-than-expected amount in September.

``Everything from emerging markets to stock funds are doing well,'' said George Lucaci, managing director at New York-based Channel Capital Group Inc., whose HedgeFund.net database tracks returns. ``That's because there's a belief the Federal Reserve is your savior -- if things get bad, they will lower rates.''

The benchmark Standard & Poor's 500 Index rose 1.6 percent in October and 10.8 percent this year. Officials for Pequot and Passport declined to comment.

Big Gainers

October was the best month for hedge funds since a 3.5 percent increase in January 2006. Emerging-market funds jumped 5.2 percent, exceeding a 4.7 percent gain in September.

The equity fund run by New York-based Zweig-DiMenna Partners LP, with $4 billion in assets overseen by Martin Zweig and Joseph DiMenna, returned 70 percent in the first 10 months of the year, investors said.

Tremblant Capital LP's $3.5 billion Tremblant Partners stock fund has returned 27 percent so far this year and its $650 million concentrated fund is up 40 percent, according to investors. Tremblant, founded in 2001 by Brett Barakett, a former portfolio manager at Moore Capital Management LLC, oversees a total of $4.6 billion.

Clarium Capital Management LLC, the San Francisco-based hedge-fund firm with more than $3 billion, gained 9.8 percent last month and 17.7 percent in 2007, according to a client letter. Clarium, run by Peter Thiel, 39, is among macroeconomic managers that bet on the direction of interest rates, currencies and commodity prices.

Subprime Securities

Passport, run by John Burbank III with more than $3.4 billion in total assets, wasn't the only manager taking advantage of rising defaults on loans made to the highest-risk home buyers. Indexes linked to subprime mortgages tumbled last month after Moody's Investors Service and other ratings firms downgraded top-rated pieces of collateralized debt obligations tied to home loans. At least $7 billion of AAA securities were either downgraded or put on watch on Oct. 26 alone, according to a Bloomberg tally.

Paulson & Co., the New York-based firm run by John Paulson, extended its record gains this year, returning 22 percent to 25 percent in its Credit Opportunities funds that control $8 billion, according to investors. Those funds are now up between 329 percent and 550 percent this year.

Paulson, 51, who was a managing director at Bear Stearns Cos. in the 1980s, has increased his firm's assets almost sixfold since July 2006, to more than $27 billion.

The industry overall posted a return of 2.7 percent in September following a 1.5 percent loss in August, Hedge Fund Research said.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested. Globally, managers oversee more than $1.8 trillion, according to Hedge Fund Research.