Don't Look Now, But Some Big Names Are De-Risking Again

If asked to describe the summer season, words that may come to mind include warm, relaxing, sunny, etc. Hardly seems fitting to call the month of August “gloomy,” right?

Unfortunately, financial experts have deemed this term the appropriate adjective to express the horror which hit the hedge fund industry last month, globally losing approximately $45.32 billion according to the latest information from hedge fund data tracker Hedgefund.net in its recent report titled “HFN Hedge Fund Industry Research.”

“The decrease in assets represents a loss of -1.52% to an estimated $2.531 trillion global hedge fund industry.

The recent downturn, the worst since the 2008 global financial crisis, has gone so far as to negatively impact industry veterans and master managers, all taking hits from the market sell-off.

As a result, such high-profile hedge fund managers, like Appaloosa founder, David Tepper, have been actively searching for ways to de-risk and secure their stressed funds.

At the beginning of 2011, Tepper’s portfolio appeared poised for an explosion run given that his top three holdings: Wells Fargo, Citigroup and Bank of America were on a roll. But in the first quarter the subsequent collapse of financials began and Tepper began selling shares. Public records indicate that by the end of June, Tepper had sold off his financial holdings to mere fractions of what they had once been, yet managing to get out just in the nick of time before his colleagues at Paulson and Co. lost boatloads of client capital in bank stocks (Paulson’s flagship fund is reportedly down 34% year-to-date).

Instead, Tepper has more recently opted to invest in cash, building up his fund by as much as 30-40% in cash or fixed income securities, such as U.S. Treasuries. A seemingly odd choice? However, the manager, who has recently been publicly vocal about his aggressive stock gambles, seems apprehensive with mounting threats both at home and across the pond.

One MarketWatch blogger stated: “Yes, the hedge fund manager who has ice water in his veins and who likes to ride roller coasters with his hands in the air has turned cautious.”

Furthermore, reports suggest he intends to maintain this safe stance until a bridge is built over troubled water—or the European debt crisis is resolved.

Unfortunately, this situation overseas seems only to be worsening as daily ECB deposit facility usage hit a year high at 170 billion.

Sources say Tepper will not aggressively spend the cash, except to buy up shares in stocks already in his portfolio.

The head honcho at Appaloosa is not the only high profile manager struggling and attempting to eliminate risk.

Also in August, Steven Cohen, founder of SAC Capital Advisors experienced the single largest monthly loss since November 2008, nearly 3% to be exact.

In response, critics are questioning the manager’s skill and abilities.

According to Peter H. Laurelli, CFA Vice President of the Research Division at HFN, August’s decline was primarily performance (or lack thereof) -driven.

“Prior to August, investor flow trends had been of declining net allocations and rising redemptions which led to the net outflow in July; the first month net investor flows were negative since June 2010,” Laurelli said. “August inflows appear to have been driven by commodity and certain credit strategies as emerging markets and event driven sectors experienced large net outflows.”

 

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