Alpha - September 2007 - (Page 37)

enced asset outﬂows of more than $100 million, factoring in the impact of performance. That month 86 funds grew by more than $100 million. “We actually think it’s healthy for the industry to go through a winnowing process,” says Makena’s Ross. “Over the past three or four years, a lot of funds have flourished with investment strategies that we don’t believe are truly skill-based, and the volatility of the markets this summer has exposed some of those momentum players for what they are. Our expectation is that the continued volatility will only serve to further expose those hedge funds that really weren’t making their returns with a skill-based approach.” For those investors lucky enough — or smart enough — to have put their money with managers who have been successful at mitigating risk, this will likely be a time of reflection, but not necessarily one of major asset reallocation. Robert Hunkeler, who as vice president for investments at International Paper Co. in Stamford, MKP’s Patrick McMahon: Learning from the past. Connecticut, manages the company’s $8.4 billion pension fund, doesn’t anticipate making any major changes to his $750 million hedge fund portfolio in the months ahead. “Hedge funds were hit hard in August, and our portfolio of funds of funds and multistrategy funds was no exception,” says Hunkeler, who has investments with eight firms. “But fortunately, the hit was nowhere near lifethreatening. And thanks to exceptional performance in the first half of the year, our year-to-date hedge fund results are still very solid — roughly 6 to 7 percent through the end of August.” Many investors may not ﬁnd themselves so fortunate. In the interest of capital preservation, they might want to remind themselves of several key truths about hedge fund investing: Market dislocations make everything correlate. Investors need to anticipate the worst during periods of major market dislocation and assume that even their best efforts to diversify may fail. During times of stress, individual securities — and even differentiated investment strategies — often move in tandem. In the most recent market upheaval, those unexpected correlations began at the level of individual structured products, like CDOs. As the subprime components of those products began to implode, the prices of all of the component bonds and up 57.19 percent through July, including a 25.82 percent return that month alone. Pucci played it safe with the $175 million fund in August, raising cash by monetizing some of his winners, and anticipates a “ﬂattish” return. “In August, we decided to run very light risk given the illiquidity of the market,” he explains. Discovery Capital Management founder Robert Citrone says he became aware of the subprime market problems in February 2006. Although his $2.5 billion Norwalk, Connecticut, ﬁrm specializes in emerging markets, he and his team do a lot of macroeconomic analysis on the U.S. In July the firm’s flagship Discovery Global Opportunity Fund was up 10.82 percent in part by being short credit. For the year the fund is up nearly 25 percent, despite falling an estimated 69 basis points in August. One of the keys to Discovery’s success has been the growing demand for consumer goods in emerging markets. “We’ve done a good job picking companies in the ﬁnancial, beverage and retail sectors,” says Citrone, who began his hedge fund career overseeing emerging markets investments for Julian Robertson Jr. at Tiger Management Corp. from 1995 to 1999, after heading Fidelity Investments’ emerging-markets fixed-income and currency group. Citrone looks for companies with dominant domestic market share. He says the lack of consumer debt in many emergingmarket countries — roughly $80 to $200 per capita, compared with $42,000 on average in the U.S. — leaves signiﬁcant room for credit growth even if the U.S. economy slows down. One credit fund that effectively weathered the subprime storm is Sola, managed by Solus Alternative Asset Management, a New York–based firm that investment manager Stanﬁeld Capital Partners spun out earlier this year. Sola, which focuses on capital structure value investing, is up 17.4 percent for the first eight months of 2007, including a 2.24 percent return in July and 1.07 percent in August. Christopher Pucillo, manager of the $2.3 billion fund, looks for opportunities, both long and short, in everything from senior secured loans to equities post–corporate reorganization. This year much of his success has come from shorting. — Frances Denmark Photo by Tom Tavee for Alpha SEPTEMBER 2007 • INSTITUTIONAL INVESTOR’S ALPHA • 37

Table of Contents Feed for the Digital Edition of Alpha - September 2007

Contents Letter from the Editor Longs & Shorts Pension Corner: Keeping the Faith The Good Guys: Going Public Interview: Barry Bausano - A Delicate Balance Cover Story: Cruel, Cruel Summer Profile: Phil Cooper - Alternative Flight Plan Strategies: Marshall Wace - TOPS in Its Field Profile: Fortis Investments - Banking on Alternatives Research Center: Top Equity Trading Firms Alpha Bytes: Desktop Duel Unhedged: Commentary - The Taxman Cometh

Alpha - September 2007

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