MANAGED FUTURES REMAIN IN BLOOM AS HEDGE FUNDS TAKE A BAD CLIPPING: GAINS WERE PRUNED FOR YEAR, ESPECIALLY IN EMERGING MARKETS, BUT DERIVATIVES HEDGING STILL A SHEER DELIGHT

It worked.

Managed futures, that is.

Along with derivatives hedging, managed futures gave institutional investors diversification in the stock market’s recent free fall.

The hedge fund industry in general, however, failed to provide a cushion against the market downturn — even though that’s what hedge funds say they do.

Emerging markets managers have been hit particularly hard by the turmoil in Russia and the stock market’s gyrations since late August.

Experts believe the hedge fund industry could face further problems if investors decide they want their money back, keeping managers from riding out long-term trades that ultimately could produce gains.

Long commodities investing has been a disappointment, with prices falling, thus boosting managed futures’ returns.

For those invested in managed futures or derivatives hedges or with well-performing market-neutral managers, the results for August are impressive.

A preliminary tabulation by Managed Account Reports Inc. of New York, shows managed futures advisers posted a 5% return in August, the same as their year-to-date total returns.

Meanwhile, the total return of the Standard & Poor’s 500 Index was minus 14.5% in August and minus 0.38% year-to-date.

“Managed futures can really take advantage of these patterns that are hurting traditional markets. That’s exactly what happened in August,” says Dave Love, president of futures manager Kenmar Institutional Asset Management LLC in Rancho Santa Fe, Calif. “We get to be the winners, finally.”

Vassar College in Poughkeepsie, N.Y., began investing in managed futures in July, and reaped returns of 12% on the allocation in August, says Jay Yoder, director of investments.

Vassar’s $4 million managed futures allocation is with Commodities Corp. USA of Princeton, N.J., through a fund of funds called Director’s Fund.

Likewise, the managed futures allocations at San Diego County Employees’ Retirement Association and Detroit Edison Co. posted strong performance during the market tumult.

Commodities allocations linked to the Goldman Sachs Commodities index lost about 29% this year through August. Getting on the other side of that trade resulted in gains for managed futures.

“Being short the commodities markets has been a tremendous help,” says Raymond E. Ix Jr., senior vice president at Mount Lucas Management Corp. in Princeton.

Mount Lucas’s passive managed futures index is up 15.45% year to date through August, he says.

Still, the recent outperformance of managed futures might not be enough to spur a resurgence of interest in the strategy.

“You’re going to need more evidence that this is more than a harsh correction in a bull stock market,” Kenmar’s Mr. Love says. What’s needed is a series of periods during which managed futures outperform.

Hedge funds might be hard hit by market events and managers’ subsequent performance. Those in the industry are gloomy about the future.

“There’s hardly anybody making money,” although some are losing less, says bond hedge fund manager William Michaelcheck, founder and chairman of Mariner Investment Group Inc. in New York.

“There’s fear in the market place right now. It’s not drop-dead fear, but there is fear,” says Carrie McCabe, president and chief executive for Blackstone Alternative Asset Management, which operates a fund of hedge funds in New York. “There’s going to be a shakeout.”

But at Vassar, they’re taking the hedge fund performance in stride.

Mr. Yoder says the college’s hedge funds fell only 5% in August, despite a 35% loss from one investment, an international “event-driven” fund managed by Everest Capital International in Hamilton, Bermuda.

But Vassar’s hedge funds fell much less than market indexes during the month.

Other investors in hedge funds might not come out as well.

Joseph Nicholas, president of Hedge Fund Research LLC in Chicago, says even funds that appear to have been conservatively run might own Russian debt or other securities hit hard in August.

“That is where institutions are going to have a rude awakening,” Mr. Nicholas says.

Managed Account Reports, which tracks hedge funds as well as futures managers, termed August “a blood bath,” showing 76% of reporting hedge funds to be down for the month.

Its figures show event-driven managers, who profit from specific deals, were down 6.4%; global managers, down 8.8%; and funds of funds, down 3%. While pure short sellers also performed well — up 21.8% — their use by tax-exempt investors is limited.

Richard Meckler, chief investment officer for hedge fund manager LibertyView Capital Management Inc. in New York, says the reaction in emerging markets to the U.S. turmoil led hedge fund managers to sell first their most liquid investments, which tend to be U.S. securities.

“The line between being famous for making a big bet and being infamous is pretty thin,” he says.

For example, well-known trader John Meriwether’s hedge fund shop, Long-Term Capital Management LP in Greenwich, Conn., disclosed losses of 44% in August, and 52% for the year through August, in a letter to investors.

While to an extent the market needed a shakeout, the main question now is whether volatility leads to redemptions that could trigger additional market falls, Mr. Meckler says.

Marc A. Spungin, president and chief investment officer for Prairie Investment Management LLC in Chicago, agrees. “What will people do if managers are forced to sell during the rest of the year?”

Notes Alan Brown, the London-based chief investment officer for State Street Global Advisors: “You will see casualties, and they’ll get a lot of attention,” but many hedge fund managers have “ridden things out without any problems.”

For some portfolios, the big fall in U.S. stocks was tempered by hedges that until recently were losing money, although the price of hedging has skyrocketed as a result of the market’s increased volatility.

“You have to be more creative with how you construct your hedge,” because of the high cost of purchasing puts — options whose buyers profit when stock prices fall — says Jack Hansen, principal and director of equity investments for Clifton Group in Minneapolis.

Mr. Hansen says some investors are making up for lost ground from hedges placed ahead of this year’s runup and are close to posting gains on those positions.

He notes that one client in Clifton’s derivatives-based rebalancing program sold stocks when the S&P 500 was near 1184 in July and was back buying on the morning of Sept. 1, before a big rebound.

Crain News Service