Tuesday, May 19, 2009

Och Stores Up Cash as Funds Brace for Stock Losses

Daniel Och had about 35 percent of his $20 billion of hedge-fund assets in cash during the first quarter because he suspects global stock markets will start falling again.

“The world will not just bounce back to where it was,” Och, the 48-year-old chief executive officer of New York-based Och-Ziff Capital Management Group LLC, wrote last month in a letter to investors, referring to the gain of almost 35 percent in the Standard & Poor’s 500 Index since March 9. “We continue to believe that economic recovery will be a long process.”

OZ Master, Och-Ziff’s biggest hedge fund, rose 6.3 percent this year through April after losing 15.5 percent last year. The S&P 500 fell 3.4 percent in the first four months of 2009 after dropping 38 percent in 2008.

Hedge-fund managers, including David Einhorn, John Horseman and Dmitry Balyasny, are telling clients the stock market rally won’t last because of the economy. Their bearish view contrasts with Traxis Partners LP’s Barton Biggs and Byron Wien of Pequot Capital Management Inc., who say it’s time to buy equities.

The U.S. recession, which started in December 2007, probably will end in the third quarter, according to the median estimate of 61 economists surveyed by Bloomberg.

Stock hedge funds declined by an average 27 percent last year, according to Hedge Fund Research Inc., the most since the Chicago-based firm began tracking the data in 1990. Equity funds rose 5 percent this year through April. The average gain for the hedge-fund industry is 4 percent for the period, according to the research firm.

‘Gut’ Feeling

“Economic numbers, housing data, earnings, risk appetite and credit have all gotten less bad,” Balyasny, who oversees $1.6 billion as chief investment officer of Balyasny Asset Management LP in New York, told clients in a letter reviewing first-quarter returns. “The question is, for how long?”

Balyasny’s Atlas Global Fund, which invests primarily in stocks, gained 0.5 percent last year and was up 2 percent in the first quarter. The 36-year-old fund manager told investors his “gut” says stock prices will drop in the second or third quarter.

“Put brutally, it is hard to build longer-term confidence when employment prospects and job markets are shrinking,” Horseman wrote in an April letter to clients of his London-based Horseman Global Fund LP.

The bears haven’t been able to ignore the 37 percent advance in the MSCI World Index since March 9, when the benchmark of 1,677 stocks in developed and emerging markets hit a 13-year low. They have bought more stocks and covered some of their short positions, or bets that prices will fall.

Barakett Bails Out

Horseman, 50, reduced the fund’s shorts by about a third to limit losses as stocks rose, leaving him with an 11.4 percent decline through April. The $4.6 billion fund gained 30.8 percent in 2008 as the MSCI World fell 40 percent, including dividends.

Tim Barakett’s Atticus Capital LP sold 23 of the 25 U.S.- listed stocks the New York-based firm owned in the first quarter, according to a filing last week with the U.S. Securities and Exchange Commission. That means Barakett, 43, has a larger proportion of his $6 billion of assets in cash.

About 30 percent of stock hedge funds were sitting on cash at the end of April, compared with 45 percent as of Dec. 31, according to a report published this month by New York-based Morgan Stanley. Net exposure -- the difference between the amount funds wager on rising and falling stocks -- rose to 32 percent in April from 27 percent the previous month.

Increased Borrowing

The funds that are fully invested have started to increase borrowing, although the amounts are below what they were before last year, when stock funds’ leverage equaled about twice net assets, the Morgan Stanley report said. At the end of April, borrowing was 28 cents for every dollar of assets, up from 14 cents a month earlier.

Balyasny is borrowing about 20 cents for every dollar of net assets in his stock funds. He also has about the same amount of money betting on stocks he expects to rise as those he expects to fall.

“The situation is quite fluid and we have to respect the probability that the market is going to continue discounting bad news and embracing every slight improvement, causing shorts to eventually capitulate,” he told clients.

Financial Stocks

The S&P 500, the benchmark for large U.S. stocks, rose 3 percent yesterday, its biggest gain in two weeks. Financial stocks led the advance after the cost of borrowing in dollars between banks dropped the most in two months as credit markets continued to thaw.

Wien, 76, chief investment strategist of Wilton, Connecticut-based Pequot, said in mid-April that U.S. stocks had hit their lows, housing would start to rebound by the end of the year and the nation’s gross domestic product would rise in the fourth quarter. Biggs, also 76, who runs New York-based Traxis Partners, said a week earlier that the U.S. stock market is at least one-third of the way into its rebound.

Einhorn, who runs the $5.1 billion Greenlight Capital Inc. in New York, used the market rally to sell some stocks. He also decided to return to last year’s wager that financial stocks would fall. Shares of banks and brokers have jumped 92 percent since March, as measured by the S&P 500 Supercomposite Financials Index. He’s also wagering against real estate investment trusts, which climbed 52 percent in that period, according to the S&P Supercomposite REITs Index.

“It’s apparent that the country faces extraordinary economic challenges that will at a minimum lead to a very uncertain investment landscape,” Einhorn, 40, wrote in a May 1 letter to clients. The main question for him is whether the government’s stimulus spending will be enough to overcome the financial crisis.

Since the outcome isn’t clear, he’s bought gold, which typically rises when the economy worsens. He’s also purchased options that will make money if interest rates increase over the next few years, which may happen if government spending leads to growth and inflation.