The 20 Rising Stars of Hedge Funds 2008

“Typically, it takes a year or two for a cycle to turn,” Strubel said. “Credit weakness can be seen in consumer-related industries such as homebuilders, restaurants, retailers, casinos and automotive, so we have avoided these. We prefer industries that maintain pricing power worldwide, such as energy, agriculture and materials.” Similarly, Strubel noted that emerging market stocks are down substantially worldwide, but the underlying economies are still chugging along. “On the credit front, yields are blown out but underlying fundamentals are still very encouraging,” he added. One special case is China, where the government is still stoking development but trying to clamp down on speculation. Looking ahead for the rest of this year, Strubel sees the market today in the middle stages of bottoming out. “This is punctuated by policy responses from the Federal Reserve and other government agencies,” he said. “Banks are getting a handle on their liabilities, even if they have not finished writing them off.” That said, he does not see a meaningful rebound for quite a while. said. “Funds are providing essential resources and seeing returns of as much as 1% to 1.5% per month. The banks are not out there, but hedge funds with capital are in a strong position.” Putting his money where is mouth is, he added that asset-backed lending is doing very well for Magnum. Friedland is not surprised that global macro strategies are doing well. “They are the guys who benefit in choppy markets,” he said. The surprise, however, is that some equity long-short managers can prosper. “They usually do well when stocks act rationally. But these days they are acting irrationally and getting sideswiped by news outside the market.” Hennessee Group tracks its own return leaders. Charles Gradante, co-founder of Hennessee, noted that the best performing strategies over the past three years have been: emerging markets in 2007, especially Latin America and Brazil/Russia/India/China; telecom and media in 2006; and Asia-Pacific in 2005. He added that converts have done well in each of the past three years, but they are struggling in the early indicators this year. really wind. If the Democrats get “This year, healthcare is might sucking start shorting that sector. into the White House, you want to ” — Charles Gradante At present, the distressed market has plenty to keep Strubel busy because his fund is seeing distressed yields on non-distressed companies. “It is really quite compelling,” he said. “When those yields start to tighten, it will be time to look at the truly distressed assets.” At that point, it will be easier to discern which investments have gotten themselves sorted out and are poised for recovery. Sizing Up 2008 David Friedland is a principal of Magnum Funds, a multistrategy asset manager with fund-of-fund and single-country offerings. His Russia Fund finished third in the three-year return ranking. He also happens to be president of the Hedge Fund Association and, as such, congratulated the top finishers. However, he noted that early returns for 2008 look like this year will turn the previous few on their heads. “The ones that have done the best, the emerging markets funds, are doing the worst year to date,” Friedland said, “although those are still significantly better than the U.S. or Europe. Long term, emerging markets are still the place to make money. But short-term, I will just say that we are dealing with the volatile end of the hedge fund market.” Friedland also concurred that hedge funds are providing vital liquidity when traditional sources of leverage have all but abandoned the field. “Asset-based lending is very popular,” he MAY 2008 Looking ahead sector by sector, Gradante said healthcare was a disappointment in 2007 but the sector still beat the Dow Jones Industrial Average. “This year, however, healthcare is really sucking wind,” he added. “If the Democrats get into the White House, you might want to start shorting that sector, especially in places that do not have a strong research and development pipeline.” Energy has held up well, Gradante said, quickly adding that the price of crude oil has become a speculative game. The same can be said of other commodities, especially metals. “The speculators are pushing the futures higher and hoping that the cash spot market will follow,” he explained. “There also is a serious food shortage developing in Asia. If we get a full-blown recession in the U.S., that speculation is going to collapse and we could see as much as a 30% drop.” One thing that particularly concerns Gradante is that the Federal Reserve does not seem to have as direct a control on the economy as is widely understood. “The new paradigm is that control of the money supply does not necessarily control the willingness of banks to lend,” he said. “The Fed has loosened the money supply again and again, and we don’t see the banks turning around and lending. I am not sure that dropping interest rates any further will solve the credit crisis.” i HEDGE FUND RISING STARS 17

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The 20 Rising Stars of Hedge Funds 2008 Contents Looking Great for 2008 A Matter of Supply and Demand Return Performance Highlights Challenging Period 20 Rising Stars of Hedge Funds Mentors' Page

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