Hedge funds – the daredevils of Wall Street – are backing away from risk, fearful of getting beaten up by the market’s persistent turbulence.
JPMorgan Chase’s Highbridge Capital and Phil Falcone’s Harbinger Capital are among a growing number of big-name hedge funds that are hunkering down, moving into cash and reducing the use of borrowed money, or “leverage,” to inflate returns, sources said.
“Markets are irrational and the best thing to do when markets are irrational is to move into cash, increase liquidity and take down risk,” said an official at Harbinger, which manages $21 billion.
“A lot of smart hedge funds are sitting on cash right now, and that’s the position we’ve taken,” said an employee at Highbridge, the $28 billion hedge fund shop in which JPMorgan holds a big stake.
The flight to safety reduces the chances of any surprise blowups in the coming months.
But it also kills the likelihood that any new stars will be born; fund managers’ nerves are too frayed to make the kind of big, directional bets that could reap big rewards.
“Maybe there’re not going to be any rock stars this quarter,” said Peter Griffin, an energy trader and consultant in Stamford, Conn. “The markets, they’re so choppy right now,” and people are trying their best to not get “whipsawed,” he said.
The handful of funds that have actually made money this year are just eager to lock in their gains and call it a night.
Harbinger, for example, posted returns of 14 percent as of the end of August. Highbridge’s results are more varied, but it, too, has some gains to protect, including returns of 12 percent in its Highbridge Statistical Opportunities Fund.
In some cases, hedge funds – especially the poor performers – are being pressured by their lenders, known as prime brokers, to reduce their risk.
Goldman Sachs, for example, is “tightening up their risk management and forcing funds to deleverage,” said a person familiar with the situation.
Goldman officials didn’t respond to a request for comment.
The flight to safety, whether voluntary or forced, started at the end of July, when one of the few sure-fire bets of 2008 – that oil prices will go higher and financial stocks will fall – suddenly failed.
The trend ratcheted up in late August after a sudden spike in oil prices slammed some investors by tricking them into believing oil was on its way back to $150 a barrel.
Instead, crude settled at $106.34 a barrel yesterday, down from a high of $147 in early July.
One firm that seems to have taken the bait and suffered is Dwight Anderson’s Ospraie Management, a commodities shop that is closing its $3 billion flagship fund following heavy losses in August. Other firms are expected to follow.
By contrast, BlueGold Capital swiftly moved to “take down risk” after getting knocked down 19 percent in July, said Dennis Crema, a founding partner of the London-based fund. As a result, BlueGold was saved from the August turmoil, gaining 3 percent that month.
So while the fund is off from highs of 160 percent before things turned sour, it’s still sitting pretty on annual gains of 115 percent.