Key Takeaways
- • Hedge funds gained an average of 5.23% in May 2009, bringing year-to-date returns to 9.43%, marking a significant recovery from an 18% average loss in 2008, according to the Hedge Fund Research index.
- • Citadel Investment Group's flagship Kensington Global Strategies Fund rebounded dramatically to +20.37% year-to-date after suffering a 54.49% decline in 2008, driven by recovery in convertible arbitrage strategies that gained 19.48% this year.
- • Major hedge funds including Moore Capital Management, Paulson & Company, SAC Capital Advisors, and Tudor Investment Corporation posted substantial gains across multiple strategies as confidence returned to equity and debt markets.
- • Carl Icahn's $5.5 billion fund gained 16% year-to-date after a 37% loss in 2008, when he was forced to inject $500 million of personal capital to support the fund, demonstrating broader sector recovery among activist investors.
- • May 2009 represented one of the best performing months in hedge fund history, with gains broad-based across nearly all strategies, signaling a turning point for an industry devastated during the financial crisis.
Summary
Hedge funds are staging a substantial recovery from the financial crisis, with May 2009 emerging as one of the strongest months in industry history. On average, hedge funds climbed 5.23 percent during the month, pushing year-to-date returns to 9.43 percent, according to an index compiled by Hedge Fund Research. This performance marks a sharp reversal from 2008, when the industry experienced an average loss of 18 percent—its worst year on record.
The recovery has been broadly distributed across major industry players and investment strategies. Moore Capital Management, Paulson & Company, SAC Capital Advisors, and Tudor Investment Corporation all posted significant gains as confidence gradually returned to equities and fixed-income markets. According to Andrea Gentilini, director of prime services for Barclays Capital, "May has been a remarkably strong month as it relates to hedge fund performance across the board. Even the strategies that have been under severe stress over the course of the last two years have continued to post strong performance."
Among the most dramatic turnarounds is Citadel Investment Group, the Chicago-based firm led by 40-year-old billionaire Kenneth C. Griffin. Citadel's flagship Kensington Global Strategies Fund has recovered to +20.37 percent year-to-date after plummeting 54.49 percent in 2008. This resurgence has been particularly driven by convertible arbitrage trading—a strategy involving the purchase of convertible securities while shorting the underlying common stock. Convertible arbitrage, which inflicted severe losses on Griffin's investors during the crisis, has gained 19.48 percent this year, according to the Credit Suisse/Tremont Hedge Fund Index.
Activist investor Carl Icahn has similarly experienced a dramatic reversal of fortune. After a 37 percent loss in 2008 that forced him to inject $500 million of his own capital into his fund, Icahn's $5.5 billion operation has gained 16 percent year-to-date. The broad-based nature of May's gains, spanning nearly all strategies and sectors, suggests the beginning of sustained recovery for an industry that faced unprecedented stress during the preceding two years.
The recovery has been broadly distributed across major industry players and investment strategies. Moore Capital Management, Paulson & Company, SAC Capital Advisors, and Tudor Investment Corporation all posted significant gains as confidence gradually returned to equities and fixed-income markets. According to Andrea Gentilini, director of prime services for Barclays Capital, "May has been a remarkably strong month as it relates to hedge fund performance across the board. Even the strategies that have been under severe stress over the course of the last two years have continued to post strong performance."
Among the most dramatic turnarounds is Citadel Investment Group, the Chicago-based firm led by 40-year-old billionaire Kenneth C. Griffin. Citadel's flagship Kensington Global Strategies Fund has recovered to +20.37 percent year-to-date after plummeting 54.49 percent in 2008. This resurgence has been particularly driven by convertible arbitrage trading—a strategy involving the purchase of convertible securities while shorting the underlying common stock. Convertible arbitrage, which inflicted severe losses on Griffin's investors during the crisis, has gained 19.48 percent this year, according to the Credit Suisse/Tremont Hedge Fund Index.
Activist investor Carl Icahn has similarly experienced a dramatic reversal of fortune. After a 37 percent loss in 2008 that forced him to inject $500 million of his own capital into his fund, Icahn's $5.5 billion operation has gained 16 percent year-to-date. The broad-based nature of May's gains, spanning nearly all strategies and sectors, suggests the beginning of sustained recovery for an industry that faced unprecedented stress during the preceding two years.
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