2012 Hedge Fund performance – Lambrusco party for some and Champagne for others

Dan Loeb, Third point

Many hedge funds have delivered meagre returns, yet again, in 2012 after a disappointing 2011. Most having not benefited from bets on the hot sectors, namely – U.S. mortgage debt, Greek bonds and eurozone banks. In 2011, the average fund dropped 4.8% and some equity focused funds suffered an average 19% drop. For 2012, the average return is better but still only around 5% this year compared with a 15% return in the S&P 500 index.

Some of the big names have got it spectacularly wrong. John Paulson’s Advantage Fund incorrectly assumed that the eurozone would ultimately break up, triggered by the issues with Greece and Italy and underlying structural weakness of the union caused by a common interest rate but with differing country by country economic fundamentals. He shorted European sovereign bonds and bought credit default swaps on European debt which offered protection against the chance of default. His bet proved a very bad one! As of October his key fund was down 17% after a massive 51% decline in 2011.

Contrast this to Third Point, headed by Dan Loeb, which is up 20% year to date and has just made a stonking $500 million profit buying Greek bonds for 17 cents and selling them back for 33 cents as part of the recent debt consolidation.  Third point tendered a $1 billion position bought over the summer as part of the debt buy back deal announced by the Greek Government this week but retains a significant holding believing there may be further upside in 2013.

When the EU and IMF made it clear that they weren’t going to let Greece default and leave the Eurozone, Third Point and others piled into Greek bonds given the more or less cast iron guarantee that the European Central Bank would back stop Greek debt as well as legal protection given they were issued under UK law. 

After the stumbles of the last few years, the Hedge fund industry is under pressure to demonstrate in 2013, that it can produce reliable returns over and above index tracking passive funds to justify their signficant fees. Whether Loeb and Third Point continue to produce exceptional performance and emulate the hedge fund greats like Ray Dalio, of Bridgewater Associates, or lose their midas touch like John Paulson’s spectacular fall from grace will be interesting to watch…

Contrarian Investor UK