Friday, December 7, 2007

Goldman Sachs, AQR Hedge Funds Fell 6% in November (Update3)

By Jenny Strasburg and Katherine Burton

Dec. 7 (Bloomberg) -- Hedge funds run by Goldman Sachs Group Inc. and AQR Capital Management LLC fell in November as swings in financial markets confounded the computer-driven trading models used by the quantitative managers.

Goldman's Global Alpha, which started 2007 with more than $10 billion, dropped 6 percent, bringing the decline for the year to 37 percent, according to an investor in the fund. AQR's $4 billion Absolute Return fund is down 11 percent, after losing about 6 percent last month, said a client of the firm, based in Greenwich, Connecticut.

Losses in November extended beyond quant managers to stock pickers such as James Pallotta, whose Raptor fund declined 3.1 percent. Traders were tripped up by increased volatility, as the Standard & Poor's 500 Index rose or fell by more than 1 percent on 12 trading days last month, compared with four days in October. The Reuters-Jefferies/CRB Commodity Price Index moved more than 1 percent on 10 days in November.

``Every manager at some point experienced a violent move against a position, whether it was in stocks, bonds, currencies or commodities,'' Philippe Bonnefoy, chairman of Geneva-based hedge fund Cedar Partners Investment Management Ltd., said in a telephone interview.

Hedge-fund managers globally lost an average of 1.4 percent in November, bringing the average 2007 gain to 10.2 percent, according to the HFRI Index, a monthly estimate released today by Chicago-based Hedge Fund Research Inc. using a sample of managers worldwide. The benchmark S&P 500 ended the month down 4.2 percent, the most since December 2002.

Raptor and Old Lane

Raptor, overseen by Pallotta for Greenwich, Connecticut- based Tudor Investment Corp., lost 8.5 percent this year, according to investors. The fund had about $8.5 billion in assets in August. Pallotta, who is based in Boston, has posted an average annual return of 19.2 percent since Raptor opened in October 1993, almost double the gain of the S&P 500.

The Old Lane hedge fund acquired this year by Citigroup Inc. lost 1.4 percent in November, trimming its 2007 gain to 2.7 percent, according to a report sent to clients yesterday. The fund, which has about $4 billion in assets, has lagged behind average industry returns since it was started in 2006 by Vikram Pandit and other former Morgan Stanley executives. Pandit is a candidate for the Citigroup chief executive officer job vacated by Charles Prince, according to people familiar with the discussions.

All the fund investors asked not to be named because returns are private. Representatives of the managers declined to comment.

Repeat of August

Multistrategy managers like Old Lane trade a range of stocks, bonds and commodities in an effort to profit from price differences between securities. Such funds gained 0.5 percent on average last month, bringing their gains so far this year to 9.3 percent, according to Hedge Fund Research.

For quant managers, November was a reprise of August, when market volatility swamped their computer models. Global Alpha lost 22.5 percent that month, its biggest monthly decline, on currency and stock trades. On top of the losses, withdrawals may leave the New York-based fund's managers with about $4 billion, investors said.

Some quants fared better. Highbridge Capital Management LLC's Statistical Opportunities fund gained less than 1 percent in both October and November, trimming its 2007 decline to about 14 percent, according to investors. The $1.5 billion global stock fund had been down 16 percent as of Aug. 8, according to a letter sent to investors at that time.

Long-Short Gain

Highbridge's $2 billion long-short stock fund gained about 5 percent in November and 33 percent this year. Long-short managers buy stocks they expect to rise and hedge those bets with short sales. In a short sale, an investor sells borrowed stock expecting to repay the loan with shares repurchased after the price falls. Highbridge, with more than $30 billion in assets, is a unit of New York-based JPMorgan Chase & Co.

New York-based manager D.E. Shaw's Oculus fund gained 1.1 percent last month and 21.5 percent this year. The firm's managers use computer programs to find price discrepancies among securities worldwide. Its multistrategy composite fund returned 1.5 percent in November and 5.1 percent in 2007, according to an investor. D.E. Shaw manages $35 billion in assets.

QIM and Pequot

Quantitative Investment Management LLC, a Charlottesville, Virginia-based hedge-fund manager, gained 3.4 percent in November in its largest fund, bringing its 2007 return to 27.4 percent, according to a Dec. 3 client letter obtained by Bloomberg. The $1.7 billion managed-futures fund uses computer-driven models to select purchases of securities to be delivered at a future date.

QIM was started in April 2003 by Jaffray Woodriff, its CEO; Michael Geismar, its president; and Greyson Williams, who oversees technology operations. The firm manages $2.7 billion, according to the client update.

Pequot Capital Management Inc., Arthur Samberg's Westport, Connecticut-based firm, returned 5.3 percent last month and almost 18 percent this year in its $400 million Short Credit fund. Wagers on rising subprime-mortgage defaults contributed to the gain for manager Steve Zamsky.

``While there is plenty of reason for concern, the contrary view may be that we will get through the current period without a recession or a bear market,'' Byron Wien, Pequot's chief investment strategist and former Morgan Stanley senior stock strategist, said in a December client letter obtained by Bloomberg.

Strategy by Strategy

So-called equity-hedge managers lost 2.4 percent on average last month, making their strategy one of the worst-performing, according to Hedge Fund Research. Such managers bet on rising prices of equities and hedge their risks by also shorting stocks they expect to decline.

Event-driven managers, who bet on securities of companies going through transitions such as mergers and spinoffs, declined 2.1 percent. Funds that focus on the securities and government debt of emerging-market countries lost 2.8 percent, Hedge Fund Research said today in a statement.

Fixed-income arbitrage funds were one of the few to rise in November, with a 1.3 percent average return, compared with the 0.8 percent average gain among the broader universe of fixed- income managers who bet on mortgage-backed, high-yield, convertible and other types of debt.

Among managers who use a variety of securities to bet on economic trends, Clarium Capital Management LLC gained 5.3 percent last month and 24 percent this year. San Francisco-based Clarium, whose $3 billion in assets are managed by Peter Thiel, was helped by wagers that securities firms' stock prices would decline and the price of oil would rise.

Moore Capital Management Inc., the New York-based firm founded by Louis Bacon that has about $13 billion in assets, declined 2 percent last month in its Moore Global Investment Fund Ltd. The fund trimmed its 2007 gain to 15 percent.

Moore Global was hurt last month by a 15 percent loss by its Canadian hedge-fund unit, which is run by former Amaranth Advisors LLC trader Manos Vourkoutiotis and invests money for other Moore funds.

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