Hedge Funds Get Stung by Slow Markets; Louis Bacon and Paul Tudor Jones Are Among Prominent Investors Losing Money on Bad Bets

Hedge Funds Get Stung by Slow Markets

Louis Bacon and Paul Tudor Jones Are Among Prominent Investors Losing Money on Bad Bets


Updated June 12, 2014 7:13 p.m. ET

Some of the biggest investors on Wall Street are losing money with wrong-way bets in markets around the globe, a surprising black eye amid a rise in stock and bond prices.

Hedge-fund managers including Paul Tudor Jones, Louis Bacon and Alan Howardare among those who have misread broad economic and financial trends. Some have lost money as Japanese stocks fell, while others have been upended by the surprising resilience of U.S. bonds.

An unusual period of calm has exacerbated problems for many trading strategies dependent on volatile markets. The losses by these so-called macro investors are contributing to a trading slowdown hurting the largest investment banks.

The flagship fund at $15 billion Moore Capital Management LP, led by star investor Mr. Bacon, was down 5% this year through the end of May, the firm has told clients. Mr. Jones’s flagship fund at $13 billion Tudor Investment Corp. is down 4.4% this year, according to a person familiar with the firm.

By comparison, the S&P 500 index is up 5.4% this year, including price gains and dividends, and the Barclays BARC.LN -0.31% U.S. Aggregate bond index, a standard measure for debt investments, is up 3.4%.

Funds operated by Mr. Howard’s Brevan Howard Asset Management LLP,Fortress Investment Group FIG -1.78% LLC, Caxton Associates LP, Discovery Capital Management LLC and Balestra Capital Ltd. also have posted losses, according to people familiar with their performance.

It is always difficult predicting broad trends, and the losses could quickly reverse. But hedge funds charge high fees with the expectation of impressive performance in any kind of market, and these investors built reputations with prescient market picks. Those running so-called macro funds generally bet on macroeconomic trends in global markets while investing in stocks, bonds, commodities and currencies.

“Macro investors have had a very, very hard time with the fact that bonds have done well and volatility is so limited,” said Matt Litwin, director of research at Greycourt & Co., a Pittsburgh-based investment firm that invests $9 billion in hedge funds and other firms but has been reducing some of its investments with macro hedge funds. “There are a lot of losers.”

Many funds piled into Japanese shares last year when they began rallying. But the Nikkei Stock Average is down 7.1% since reaching a high in January, amid doubts about the sustainability of Japan’s economic recovery. Fortress, a $63 billion firm, has acknowledged to investors in its Fortress Macro fund that it was hurt by both this year’s run-up in U.S. Treasury prices and weakness in the Nikkei. The Fortress Macro fund was down more than 3% this year as of June 6.


Brevan Howard Capital Management’s roughly $28 billion flagship fund was down 3.8% through June 6, according to an investor in that fund, with interest-rate and bullish Nikkei bets among its losers. Caxton Associates in New York, an $8 billion firm, has lost money every full month this year and was down more than 6% at the end of May, according to the firm’s investor updates, partly due to bearish currency positions.

Kyle Bass’s $2 billion Hayman Capital Management LP has lost money on wagers against some European countries, as well as a bet on further weakening of the Japanese yen, people familiar with the firm say. The Dallas-based firm’s main fund suffered its steepest two-month drop in five years at the start of the year and fell more than 6% in the first quarter, these people say.

Woodbine Capital Advisors LP, a well-known fund run by Joshua Berkowitz, a former senior trader at Soros Fund Management, recently announced plans to stop managing outside money after disappointing returns.

Larger funds have a handicap in slow markets: They can be too big to trade in smaller markets that are seeing more volatility.

“You can’t put $1 billion in coffee contracts and expect to get out quickly, so the big funds can’t have these smaller plays in their portfolios,” said Sam Diedrich of Pacific Alternative Asset Management Co., an Irvine, Calif., firm that invests in hedge funds.

The setbacks for macro investing—a style made famous by George Soros and others who anticipated past market turns—come after a rush of investors embraced this approach to trading, thanks to its impressive performance during the financial crisis.

Macro funds on average gained 4.8% in 2008, even as the S&P 500 fell 37%. Other investors saw how John Paulson, a onetime merger specialist, made $20 billion in profits at his firm, Paulson & Co., anticipating the 2008 meltdown, and they vowed to adopt macro strategies as well.

Today, there are 1,865 hedge funds focusing on macro investing, up from 1,233 in 2008, according to HFR Inc., which tracks the hedge-fund world. That growth is much faster than that of the overall hedge-fund business. Macro funds manage $508 billion, up from $279 billion in late 2008. But macro funds have had three years of disappointing returns.

The poor results are prompting investors to pull money from macro funds and are forcing some funds and other financial groups to scale back their trading. Large banks includingGoldman Sachs Group Inc.,GS +0.32% J.P. Morgan ChaseJPM -0.40% & Co., Morgan StanleyMS +0.13% and Barclays PLC execute many hedge funds’ trades. Such banks tend to benefit from rising trading volumes and volatile markets.

Amid the recent quiet, many banks have posted soft results, and some have laid off traders. Goldman SachsPresident Gary Cohn said last month that unusually slow markets had made it “difficult” for Wall Street firms. Morgan Stanley said this month it would cut jobs from its currency and rates-trading businesses in response to tepid investor activity.

Some worry that a lack of volatility will continue to haunt various markets, perhaps until the Federal Reserve signals higher interest rates are imminent following a long period with benchmark rates near zero.

“I actually find myself daydreaming about winning ‘Dancing With the Stars’ on some days in the office,” Mr. Jones, of Tudor, joked at an investment conference this spring. “It’s gotten to be very difficult, when you depend on price movement to make a living, and there is none.”

Average daily bond trading has fallen to about $734 billion, the lowest level in more than a decade, according to the Securities Industry and Financial Markets Association. The CBOE Volatility Index, the most widely cited measure of investor expectations for daily stock-market swings, on June 6 slipped to 10.73, its lowest closing level since 2007, according to FactSet.

“These are very uninteresting times in the market,” Jared Dillian, a former trader who now writes a newsletter, recently told his subscribers. “The goal is to not fall asleep.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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