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Sub-Prime Returns

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Squeezed between a credit panic and intense volatility in stock prices, some of the most highly regarded hedge fund managers have spilled huge amounts of red ink in the past few weeks. Some of these firms may be shutting down certain strategies while others are trying to use their quantitative models in new ways. Last month we wrote about collateralized debt obligations held by hedge funds and their effect on corporate leveraged loans. This month, let’s look at some specific hedge funds’ reactions to the subprime crisis.

AQR Global Stock Selection High Volatility Fund has been so badly hit by equity market movements that is was down 33% year-to-date as of August 9, according to information obtained by HedgeWorld. The fund has an aggressive investment strategy, as suggested by its name.

AQR Capital Management LLC, based in Greenwich, Connecticut, managed $35 billion in various funds as of early this year and was favored by large institutional investors. The Global Stock Selection High Volatility Fund is only one among a number of AQR products, some of which have conventional strategies.

The firm’s founders, Clifford Asness, Robert Krail, and John Liew, were previously the senior managers of Goldman Sachs Asset Management’s Quantitative Research Group. AQR, which the three men founded in 1998, is modeled on Goldman Sachs, whose own funds have also sustained double-digit losses of late.

AQR’s problems confirm that the general quantitative approach is susceptible to big drawdowns during sharp market turns, as has been long recognized by experienced investors.

Another hedge fund heavyweight that suffered steep losses, Bruce Kovner’s New York–based Caxton Associates LLC, is said to be closing down certain quantitative strategies, though a Caxton spokeswoman declined to comment.

Among other major New York-based managers, the $29 billion multistrategy shop D.E. Shaw & Co. is down as much as 20% in certain portfolios while Tykhe Capital LLC, founded by former D.E. Shaw employees, may have lost 27% year-to-date.

Redemptions and Fire Sales

The losses have been exacerbated by investor redemptions that forced fire sales of fund holdings in panic-stricken, frozen markets. According to Merrill Lynch economist Richard Bernstein, “Some equity hedge funds and quantitative long/short equity funds are now liquidating positions at decidedly unfavorable terms.”

In a research note explaining the losses, Bernstein suggested that this year was the most difficult period in the past 18 years for long/short equity managers to outperform the market. In response, those managers were tracking the market and levering to enhance returns.

One manager who might profit from the situation is Steve Cohen of SAC Capital. His team is said to have taken the unusual step of running algorithms in reverse in order to profit from the confusion. Cohen and other SAC executives own a large chunk of the capital they trade, while their outside investors have agreed to long lock-ups. Hence SAC is less threatened by redemption demands and forced sales than many funds.

Certain fund managers with heavy losses were preparing to go public. AQR recently announced plans for an initial public offering, but that is unlikely now. Tykhe Capital LLC was to manage a fund that the U.S. arm of London-headquartered Man Group plc was preparing to list on the New York Stock Exchange. Whether or when Man will proceed with the plan is unclear.–Jeff Joseph and Chidem Kurdas

Jeff Joseph serves on the advisory board of HedgeWorld (, a global provider of hedge fund information and investment products. Chidem Kurdas is the New York Bureau Chief of HedgeWorld. For information about HedgeWorld’s services, send e-mail to: [email protected].