Hedge Fund Managers Face Queries on Losses

When David Einhorn, the founder of Greenlight Capital, plays host to his investors at the American Museum of Natural History in January, his guests will sip cocktails and dine under a 94-foot blue whale in the Milstein Hall.
William A. Ackman will hold court one week later, at the New York Public Library at Bryant Park, where investors in his Pershing Square Capital Management will mingle in the historic halls of marble, wood and gold.
The lavish settings will be the same as in years past, but the circumstances will be strikingly different: Both billionaire hedge fund managers, and many of their peers, will be under pressure to explain to their investors how they lost so much money this year.
As the final performance figures for the industry come in, one thing is clear: 2015 could not have ended soon enough for many managers and their investors. Hedge fund managers like Mr. Einhorn, Mr. Ackman and Larry Robbins have stunned investors with the depth of their losses -- in the double digits for some of their investment portfolios through early December.
Pressure from investors to perform better will be intense for hedge fund managers heading into 2016. Few bank analysts expect stocks to perform much better next year than they did this year, when the Standard & Poor's 500-stock index was set to end the year largely unchanged from where it began trading. The prospect that the Federal Reserve will continue raising interest rates -- a step it took in December for the first time in nearly a decade -- may also weigh on the markets and complicate the odds of a strong bounce-back in the new year.

Steep losses this year come at a difficult time for the nearly $3 trillion industry; some pension funds have openly questioned what value hedge funds add to a portfolio in light of their hefty fee structure. Hedge funds typically charge 2 percent of assets under management and 20 percent of performance, which means that managers can still haul home multimillion-dollar paydays even when they lose money for their investors.

Hedge funds were hurt, in part, because they piled into many of the same companies -- often known as "hedge fund hotels" because of their popularity among hedge fund managers -- that suffered sharp declines in shares later in the year. Among them were SunEdison, Williams Companies, Cheniere Energy and Valeant Pharmaceuticals International, which drew negative publicity for steep increases in some drug prices.

Any hedge fund that went into 2015 bullish on energy stocks was hurt, as oil traded below $40 a barrel for most of the year.

Other losses were set off by a domino effect of macroeconomic events -- including surprise currency moves by central banks in China, Switzerland and elsewhere, as well as plunging oil prices, the collapse of commodity prices and turmoil in emerging markets.

For many firms, it was a whipsaw year, where strong gains were made in the first half of 2015 only to be reversed over the last six months. Investors in Mr. Ackman's Pershing Square will be familiar with the queasy feeling those wild swings produce. A year ago, Pershing Square posted one of its best years, generating a nearly 40 percent return. As late as the first week of August, the firm's main fund was up about 11 percent for the year. Since then, it has been on a downward trajectory, and big, concentrated bets on Valeant and Platform Specialty Products have tumbled.
As of Dec. 22, Pershing Square's main portfolio was down 19.5 percent for the year.

Other big losers in 2015 include Mr. Einhorn's Greenlight Capital, which is down 20 percent, and Mr. Robbins's Glenview Capital Management, which has lost 17 percent. The performance figures, through the end of November, were included in an HSBC report. And John A. Paulson, who made billions and a name for himself betting against the housing bubble, lost investors' money in three funds through October.
Even with the dismal numbers, there were some rising stars. The average hedge fund, as measured by the Hedge Fund Research Composite Index, was up less than 1 percent. A small group outperformed against the backdrop of a disappointing year in equity and bond markets, with the S.&.P 500 down slightly heading into the final days of 2015.
Gabriel Plotkin, a former SAC Capital Advisors manager, and his hedge fund Melvin Capital was the industry outlier. Melvin Capital, a stock-focused hedge fund that started last year, had gained almost 40 percent by the middle of November, according to a person briefed on the fund's performance who spoke on the condition of anonymity. Mr. Plotkin was one of the top consumer stock traders at SAC Capital Advisors, the former hedge fund founded by Steven A.

Cohen.
Other notable hedge funds that look poised to make the top performing list this year include Israel Englander's Millennium Management, which gained 11 percent through November, and Sahm Adrangi's Kerrisdale Capital, which was up 18 percent in the same period, said people briefed on those firms' performance numbers. Renaissance Technologies, founded by James H. Simons, and its two main funds were up more than 16 percent, according to a person with knowledge of the performance who spoke on the condition of anonymity.

A broad swath of firms also posted more modest gains in 2015, including Aaron Cowen's Suvretta Capital Management, which was up 7 percent at the end of November, and Saba Capital Management, founded by Boaz Weinstein, which gained 6 percent through mid-December, according to people knowledgeable about those firms' numbers.

Although most of the attention has been on the losers of 2015, it was not just poor performance that plagued the industry. The year also included a number of prominent closures and redemptions at some brand-name firms. And the pace quickened over the third quarter.

Three major investment firms -- Bain Capital, Fortress Investment Group and BlackRock -- were all forced to shut down hedge funds. Michael Platt also chose to throw in the towel at BlueCrest Capital Management as investor demandsgrew.

Claren Road Asset Management, which is majority-owned by the private equity firm Carlyle Group, incurred nearly $3 billion in investor redemptions this year, a person briefed on the matter said. The firm's performance was buffeted this year by investments in energy, financials and Greece. The redemptions were expected to reduce the firm's assets under management to just over $1 billion, compared with $8 billion it once managed.
Still, the overall number of hedge fund closures this year is running below last year's total of 731, according to Preqin data.
But Wall Street is famous for producing traders who make lots of money, then fall hard but still return for second and even third acts. That is no doubt something many hedge fund investors are banking on for 2016.

By ALEXANDRA STEVENSON and MATTHEW GOLDSTEIN - New York Times