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How have hedge fund elite fared in the summer turmoil?

August has been one of the most difficult months for hedge funds with sector suffering its most tricky period since the collapse of Lehman Brothers in 2008.

The global macro strategy

Hedge funds have now faced their worst month since the collapse of Lehman brothers with the recent collapse in equity markets leading to significant losses as portfolios decline in value. Provisional data from Hedge Fund Research believe that the average hedge fund has lost 4.1%, making August 2011 the fourth worst month in its history.

A recent survey by Global Alternative Investment Management (GAIM) of 185 managers revealed that many hedge funds see global macro strategies delivering the best returns next year, especially after the recent short term collapse of equities. Brazil, China and India are also seen as the best areas for investment.

Managers see global macro outshining 17 other differing strategies in 2012. Commenting on the results, GAIM event director Amanda Rodrigues-Cheung said that ‘the results reflect the array of macro-headwinds driving markets right now.’

According to Hedge Fund Research figures, the average hedge fund has lost 4.1% in the past four weeks and August 2011 will now rank in the top five worst months for the industry ever.

Asian hedge fund managers have also stated that August has been a fairly disastrous month for them and one of the most difficult they have ever faced. Sectors such as gaming had been strong in July but took large falls in August.

David Miller of Cheviot says 'At times of stress true hedge funds prove their worth. July/August will be a good test and the numbers published later this month will be worth looking at.'

'Up until the end of July, this year has been better for macro strategies if not compelling. The HFRI macro total year to date was +0.23%. Cash had proved to be a better diversifier. Hence the importance of August results. These will also highlight hedge fund managers and strategies which are over reliant on equity beta.'

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Paulson & Co.

In the first week of August Paulson’s Advantage Plus lost more than a 10% of its value, hit by large positions in financial stocks, including Bank of America and Citigroup. According to the Financial Times, as of 19 August, the flagship fund was down 14% in the month, taking the funds losses to just under 39% so far this year.

Many site Paulson’s excessive confidence since 2009 that the US economy would recover easily and that Americans would start readily spending again. Recent economic data has found this to have been rather naïve. Paulson would have also been hit by his 23.5 million shares of HP (as of June 30), which plunged after it launched a bid for UK rival autonomy

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Ray Dalio runs the world’s largest hedge fund based in sleepy, affluent Westport, Connecticut, and in mid-August it was reported to have made gains of about 5% so far in the month, up around 20% since the start of the year. This is mainly because of the rise in safe-haven investments – Treasury bonds, the Swiss franc – that Bridgewater has large exposure to.

Dalio has always been a ‘macro’ investor, betting mainly on economic trends like changes in exchange rates, inflation, and GDP growth.

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George Soros Fund Management

August was a busy month for Mr Soros, with his $5.6 billion hedge fund adding 198 new stocks and selling out of 348, described by some as a ‘wholesale reshuffling of his portfolio.’

Soros Fund Management purchased 543,900 shares of Target stock in the second quarter, bringing his overall total to 552,600. He also bought additional shares in Ralph Lauren and Lowe’s, but reduced holdings in Macy’s, JCPenney and Amazon. Target stock traded at an average of $48.97 in the second quarter, suggesting that Soros is already making positive returns.

Along with Macy’s, stocks Soros keeps selling are Interoil, Emdeon, Apple Inc. and Teradata. He also cut his stakes in Wells Fargo, Citigroup and Google. Soros cut his shares in Citigroup before it lost more than a fifth of its value.

Soros’ biggest holding is still Adecoagro SA (AGRO), an agricultural company in South America that operates in Argentina, Brazil and Uruguay. Many investors see farmland as a good bet.

It has been reported that funds managed by Soros have underperformed the market this year and last, losing 6% so far in 2011 and rising only 2.5% last year.

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As reported by the Wall Street Journal on August 19, Lansdowne Partners (Paul Ruddock, pictured) has suffered losses across all three hedge funds: Lansdowne UK Equity fund dropped 4.4% in the month to 12 August (down 15.8% this year); Lansdowne European Equity fund was down 3.6% the month to 12 August, thus down 9.4% in the year to that same date.

Lansdowne has been hit by its bets on banks, particularly Lloyds Banking Group (LLOY), which has significantly plunged this year. Lansdowne is the second-biggest shareholder in Lloyds after the UK government.

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Brevan Howard

The world’s largest macro hedge fund made close to $1.5 billion over the first three weeks of August. The fund manager has struggled in the past year, but the fund has been positioned for a global slowdown since the early summer and it was well placed for the recent turmoil.

An investor told the Financial Times earlier this month that the Master Fund was now up over 11%. William Heathcoat Amory of Kepler Partners told us that, ‘while Paulson has been positioned quite bullishly for recovery, Brevan Howard has been positioned for lower for longer, and that has worked.

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Troubles in Europe

Stephen Peak’s Henderson European Absolute Return fund fell 15.64% in the month to 5 August, according to the Wall Street Journal, and is now down 32.46% this year to 5 August.

Horseman Capital Management's Horseman Global fund dropped 13.51% in the month to 10 August, now down 5.74% this year.

The Ridley Park Paragon fund, managed by youngster Julian Barnett, fell 7.85% this month to 5 August and 25.44% for the year to the same date, as reported by the Wall Street Journal.

John Armitage confirmed that his Egerton European fund is down 4.59% to 5 August and 5.30% for the year.

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Losses for major hedges

Owl Creek Asset Management, run by Jeffrey Altman, had its offshore fund down 9.3% by mid-August. York Capital’s $2 billion York Investment fund had lost 5% over the same period.

Many of these funds were surprised by the market’s preoccupation this summer with macroeconomic events, particularly in the US with the debt crisis.

Owned by JPMorgan, Highbridge Capital’s long/short equity fund was down 9.2% by mid-August.

Other large long/short equity managers reportedly making losses are William von Mueffling’s Cantillon Global fund (down 6.25% by mid-August) and Andreas Halvorsen’s (pictured) Viking fund (down 4%).

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Those making gains: managed futures

Some of the largest hedge funds have been making gains. Man Group's flagship AHL fund, a computer-driven fund that follows market trends, jumped 5.2% between July 4 and August 1, with AHL manager Harry Skaliotis telling Reuters, ‘these are the environments in which we're expected to perform.’

Winton Capital (founder David Harding pictured), another of Europe’s biggest hedge fund managers with $22.4 billion in assets, saw its main fund gain 4.6%. The Financial Times also reported on Paul Tudor Jones’ Tudor BVI Global fund gaining 3% in August and Louis Bacon’s Moore Global fund up just under 2% so far in August.

Speaking on recent trends, Kepler Partners’ William Heathcoat Amery said, ‘What I think is really interesting is people talk about CTAs in Ucits have all performed very well and what I do think is very interesting is that people have been cynical about CTAs but the whole point is that they are a portfolio hedge, so when everything is going wrong, and so your short long equity funds are doing poorly, they do very well. For example, the LGT Capital Crown Managed Futures Ucits fund was up 4.1% in July and so CTAS are doing well.’

Heathcoat Amery said that other funds doing well recently are GLG Macro Atlas, BH Macro, and BH Global funds.

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