Research & Rankings
Hedge
Fund
Report
Card
As investors have shifted their focus back to
making money, they have also changed their
views of many big players
By Britt EricaTunick
Research & Rankings
The Hedge Fund Report Card 2010
“They’re excellent at data
gathering and
analysis and
translating that
into their
positions”
Rank
UNWTD.
2009
Firm
Total
UNWTD.
1
10
York Capital Management
52.63
2
1
Bridgewater Associates
50.12
Bain Capital/Brookside Capital Partners
50.00
Adage Capital Management
49.83
Canyon Capital Advisors
49.67
3
4
5*
8*
5*
“They are
exceptional in
terms of credibility, given the
transparency
they provide
and the way
they mark the
portfolio”
“They deal
very well with
liquidity issues.
They’re one of
the firms that
had a smaller
problem, but
they dealt with
it very well by
structuring their
new fund to
avoid having that
happen again
and by dealing
with the SPV
they set up,
which I think
was done in a
professional
way”
“[David] Tepper
puts his money
where his
mouth is”
“It's more of a
beta than an
alpha strategy”
Baupost Group
49.67
7
6
King Street Capital Management
48.88
8*
5
Taconic Capital Advisors
48.50
8*
24
Angelo, Gordon & Co.
48.50
10
30
Fortress Investment Group
47.80
11
8*
Viking Global Investors
47.00
12
Convexity Capital Management
46.67
13*
11
Wellington Management
46.50
13*
14
GoldenTree Asset Management
46.50
15
7
Davidson Kempner Advisers
46.35
16
13
Maverick Capital
46.00
17*
12
Elliott Management
45.75
17*
3
Paulson & Co.
45.75
Shumway Capital Partners
45.60
19
20
Anchorage Advisors
45.26
21
19
Och-Ziff Capital Management Group
44.77
22
2
Tudor Investment Corp.
44.67
BlackRock
44.42
23
25
28
Harbinger Capital Partners
43.33
24
27
Grantham, Mayo, Van Otterloo
43.00
26
21
Avenue Capital Group
42.95
27
JPMorgan: JPMorgan Asset Management
42.50
28
AQR Capital Management
39.60
29
Appaloosa Management
38.67
30
17
D. E. Shaw Group
38.14
31
20
Moore Capital Management
37.71
32
4
JPMorgan: Highbridge Capital Management
37.50
33
25
Millennium Management
36.50
34
29
Goldman Sachs Asset Management
35.90
35
16
Eton Park Capital Management
35.71
36*
26
Renaissance Technologies
35.60
36*
Farallon Capital Management
35.60
38
Marathon Asset Management
34.00
39
SAC Capital Advisors
33.00
40
TPG-Axon Capital Management
30.50
41
QVT Financial
29.25
42
Citadel
27.33
43
Cerberus Capital Management
26.72
*Asterisk indicates a tie.
“They tend to be
less correlated
with the stock
market than a lot
of guys”
“I wish they
weren’t so big,
but I think they
do some of the
best research of
anyone out there”
“It’s not a
terribly liquid
fund, but one
of the reasons
they’re able to
perform the way
they do is that
they know they
have investors
locked up for
fairly long
investment
horizons”
“They haven’t
done very well on
the upside. They
just haven’t generated massive
returns in recent
years, yet they
charge extremely
high fees”
“It’s an illiquid
portfolio”
Key factors when
evaluating a hedge fund
Scale: 1 to 10 (10 = “most important”)
H
edge fund investors haven’t
forgotten the carnage of
2008, and managers who
learned its lessons—as well as those making stellar returns—garnered the top
marks in AR’s second annual Hedge Fund
Report Card.
York Capital Management, with $11.35
billion, edged $50.9 billion Bridgewater
Associates out of the lead, scoring 52.63
points out of a possible 60 and jumping
nine notches from its tenth-place ranking
in last year’s survey. “I think the world of
York’s founder [Jamie Dinan] in terms of
his ability and his integrity, and needless to
say, I am impressed with his performance,”
says Richard Galanti, chief financial officer of Costco, who has been an investor
in York since its inception. Adds another
institutional investor in the firm: “They
were very bearish at the end of ’08, but then
they were very adaptable when they realized that things had changed in ’09… when
they realized equities weren’t going to be as
bad as they thought, they were able to make
that adjustment and to make something off
of it, which is very admirable.”
Investors say their main concern now is
performance, as evidenced by alpha generation jumping into second place of the
six factors that investors took into consideration when scoring the top 50 firms in
the AR Billion Dollar Club for the report
card. York, which did not restrict redemptions during 2008—which investors appear
to remember—also ranked high in transparency and liquidity, two of the other six
factors. Investors rated firms on alignment
of interests, alpha generation, independent
oversight, infrastructure, transparency and
RANK
2009
RANK
Unwtd.
Average
1
1
Alignment of interests
8.69
2
3
Alpha generation
8.47
8.07
3
2
Independent oversight
4
4
Infrastructure
7.91
5
5
Transparency
7.80
6
6
Liquidity terms
7.12
liquidity terms, scoring firms in each of
those categories on a scale from 1 to 10, for
the possible total of 60.
As investors have changed the way they
look at many of the industry’s largest hedge
fund firms, there’s been a major shift in the
lineup. Fortress Investment Group gained
the most over the past year. And although
big names like Paulson & Co., Tudor Investment Corp. and Eton Park Capital
Management fell, JPMorgan: Highbridge
Capital Management fell the most.
The differences among the top-rated
service is outstanding, their people have
been creative, and they developed products
early on in the institutional hedge fund cycle that others are now copying,” says Donald Anastasia, assistant treasurer of utility
company NSTAR, adding that he believes
the firm’s business is scalable and that he is
therefore not worried about its large size.
But not all investors feel the same. Adds another Bridgewater investor: “In the last year
or so I think they’ve fallen a bit because of
their size.”
Bain/Brookside, Adage and Baupost
Even when investors are
able to get firms to provide the
transparency they desire,
the issue is somewhat
of a house of cards
firms, however, are minimal. Second-place
Bridgewater had 50.12 points, Bain Capital/Brookside Capital took third place with
an even 50 points, and Adage Capital Management landed in fourth place with 49.83
points. Canyon Capital Advisors and the
Baupost Group rounded out the top five in
a tie, with 49.67 points each.
Despite Bridgewater’s slip, investors still
gave it high marks. “Bridgewater’s client
Survey respondent
are all new to the survey, as growth in assets moved them into the top 50 this year.
Investors praise Bain for the firm’s strong
corporate culture, governance and overall
professionalism, and say they are comfortable with the firm’s size. Adage scores high
among investors because of its analytical
capabilities, its ability to adapt to volatile
markets, and the firm’s willingness to acknowledge its own investment mistakes
Research & Rankings
Alignment of interests
Firm
Unwtd.
Average
1
Adage Capital Management
9.75
2
Baupost Group
9.67
3*
Taconic Capital Advisors
8.83
3*
York Capital Management
8.83
5*
Angelo, Gordon & Co.
8.50
5*
Grantham, Mayo, Van Otterloo
8.50
Rank
“They’re constantly trying
to improve and
don’t blame
stuff that’s
happened on
the market”
“There is
nothing really
special about
them”
▲Top 5
“Ken Griffin
holds his investors somewhere
between indifference and
disdain”
▼Bottom 5
39
Citadel
5.00
40
QVT Financial
4.75
41
Goldman Sachs Asset Management
4.60
42
Marathon Asset Management
4.33
43
Cerberus Capital Management
4.11
*Asterisk indicates a tie.
without blaming performance on the market. Nonetheless, some investors still remain a bit skeptical about the firm because
it refuses to hire an independent administrator—one of the big changes wrought by
the crash, specifically the Madoff scandal.
“I’m not happy about it, but I’m able to get
over it… They have twice-yearly audits,
and they do some other things to make up
for it,” says one Adage investor.
this year include Angelo, Gordon & Co.,
which tied for eighth place with Taconic
Capital Advisors, up from its 24th-place
ranking last year, and Fortress Investment
Group, which ranked 10th, up from 30th
last year. Not surprisingly, strong performance is the reason most of these funds
gained in the rankings, say investors.
On the flip side, several prominent and
highly regarded firms plummeted in this
Transparency is not so
much an issue with the
really good firms anymore;
they got it
Investors in Baupost describe the firm’s
founder, Seth Klarman, as a great thinker
and investor, noting that his returns tend
to be much less correlated with the stock
market than most of his peers’. “He is very
patient and careful, and in years like 2008
Buapost provides enormous downside protection,” says one.
Other firms that jumped significantly
Survey respondent
year’s rankings. Tudor, Paulson and Highbridge—in second, third and fourth place,
respectively, last year—fell significantly, an
indication of investors’ fear that the industry’s best-performing hedge funds usually
have nowhere to go but down. Highbridge,
which ranked 32nd in the survey, had the
biggest drop-off of the firms that made it
into this year’s collection of the industry’s 50
largest, down 28 spots from its fourth-place
ranking in last year’s survey. Tudor, which
came in 22nd, fell 20 spots from its secondplace position in 2009. And Paulson, which
tied for 17th place with Elliott Management,
was down 14 spots from its third-place
ranking last year.
Investors credit Tudor’s fall in the rankings to its unremarkable returns in recent
years. “The Tudor folks charge extremely
high fees. They have only had one down
year since 1984, and their protection of
capital on the downside is absolutely spectacular. But they haven’t done very well on
the upside,” says one institutional investor
in Tudor. “The perception is that they are
a world-class organization… it’s just that
over this last three-year period they really
haven’t distinguished themselves as much
as they probably would have hoped.”
Paulson still has fans in the investment
community, as he continues to be viewed
as a manager who can identify good
investment opportunities. However, there
is growing skepticism about his ability
to continue generating outsize returns
on a long-term basis. “We’re concerned
with their size these days… It’s not just
that the fund that we’re in got bigger, it’s
that they’ve also rolled out a number of
new funds and products, and you have to
wonder about their focus,” says the chief
investment officer for one institution invested in Paulson.
Alpha generation
Firm
Unwtd.
Average
1*
Adage Capital Management
10.00
1*
Baupost Group
10.00
3
Elliott Management
9.50
4
King Street Capital Management
9.00
5*
Viking Global Investors
8.83
5*
York Capital Management
8.83
Rank
▲Top 5
“The institutional equities
fund has underperformed their
long standing
Medallion fund
and there’s been
controversy
about why the
difference in
those returns”
“They have
one of the best
risk-returnadjusted track
records in
the industry”
▼Bottom 5
39*
TPG-Axon Capital Management
4.33
39*
Citadel
4.33
41
Goldman Sachs Asset Management
4.20
42
AQR Capital Management
4.00
43
Renaissance Technologies
3.80
*Asterisk indicates a tie.
Other firms whose standing among investors dropped by double digits over the
past year include Eton Park Capital Management, which ranked 35th this year, down 19
spots from its 16th-place ranking in 2009;
D. E. Shaw, landing at 30th, a 13-spot fall
from its 17th-place ranking last year; 31stplace Moore Capital Management, which is
down 11 notches from its 20th-place standing; and Renaissance Technologies, which
fell ten spots from its 26th-place standing in
last year’s survey to tie for 36th place with
Farallon Capital Management.
Investors in Eton Park attribute the
firm’s drop to a combination of weak performance and the long lockups that investors have come to disdain, especially
when accompanied by mediocre returns.
“They’re very good at not trying to hit
home runs and instead focus on capital preservation,” says one investor in the
firm. “But by being so defensive in 2009,
unfortunately, they kept their foot on the
brake most of the way and didn’t make
money… I also get a bit hesitant when
they start talking about the fact that now is
their time to start getting into some private
investments, particularly Latin America,
because you can’t make up for missing out
on last year’s market by trying to double
down,” he says.
Consistently poor performance is also
a big reason for Renaissance’s decline, just
in a bit of a different way. “Their institu-
tional equities fund has underperformed
their long-standing Medallion fund [open
only to employees], and there’s been controversy about why the difference in those
returns—whether it was just style or more
of a deeper management issue,” says one investor in Renaissance.
Several of last year’s players fell out of the
survey because of a decline in their assets
under management. Members of that group
include Barclays Global Investors, which
ranked 15th in last year’s survey; Magnetar
Capital; Stark Investments; Perry Capital;
and Black River Asset Management.
Not all the newcomers ranked too high
either. While Bain/Brookside, Adage,
Baupost and Convexity Capital Management landed in the top third of this year’s
rankings, other new additions didn’t fare
quite as well. Shumway Capital Partners
and Anchorage Advisors appeared in the
top half of the rankings, in 19th and 20th
place with respective scores of 45.60 and
45.26. The remaining eleven new additions to this year’s survey include BlackRock, 23rd; JPMorgan Asset Management,
27th; AQR Capital Management, 28th;
Appaloosa Management, 29th; Farallon,
tied for 36th; Marathon Asset Management, 38th; SAC Capital Advisors, 39th;
TPG-Axon Capital Management, 40th;
QVT Financial, 41st; Citadel, 42nd; and
Cerberus Capital Management, which
brings up the bottom of this year’s survey
in 43rd place with only 26.72 points.
When investors were asked to rank in
importance the six factors in our survey on
a scale of 1 to 10, all six categories once again
received rankings greater than 7. Alignment
of interests weighed in as most important,
with an 8.69 ranking, followed by alpha
generation with 8.47; independent oversight
with 8.07; infrastructure with 7.91; transparency with 7.80; and liquidity terms with
7.12. Comparatively, alignment of interests
and liquidity terms—which were ranked
the same way last year—received respective
scores of 8.23 and 7.19 in 2009.
The biggest factors that kept firms down
in the rankings were transparency and liquidity, which would seem odd, given that
these are the two factors investors ranked
as being least important, in that order. But
investors say that the rankings of these factors are actually not surprising and should
not be viewed as diminishing their importance. Instead, following the Madoff scandal and the market meltdown of 2008, most
investors say they consider the need for
transparency and liquidity in hedge funds
to be a given, and they would simply not
bother looking at firms that do not meet
their criteria in these areas. Therefore, investors say they tend to spend more time
focusing on issues such as alignment of interests and alpha generation.
“Transparency is not so much an issue
with the really good firms anymore; they got
Research & Rankings
Independent oversight
Firm
Unwtd.
Average
1
Bain Capital/Brookside Capital Partners
9.00
2
York Capital Management
8.80
3
Fortress Investment Group
8.60
4*
Baupost Group
8.33
4*
Convexity Capital Management
8.33
4*
Maverick Capital
8.33
Rank
▲Top 5
“It’s a corporate
culture of
appropriate governance and
professionalism”
▼Bottom 5
36*
Farallon Capital Management
5.00
36*
Appaloosa Management
5.00
38
Citadel
4.67
39
QVT Financial
4.25
40
SAC Capital Advisors
4.00
41
Cerberus Capital Management
3.38
“They don’t try
to be an institutional hedge
fund. They
run it to make
money first and
foremost”
*Asterisk indicates a tie.
I think the world of York's
founder in terms of his
ability and his integrity,
and I am impressed with
his performance
it,” says one institutional investor. “If someone won’t give us transparency these days,
we’re just not interested,” he says, noting that
most firms will now accommodate investors
by providing a look at 30-day trailing positions. But other investors are quick to note
that even when investors are able to get firms
to provide the transparency they desire, the
issue is somewhat of a house of cards, given
that even the most in-depth look at a balance sheet doesn’t indicate how all of the
derivatives and other transactions within a
fund’s portfolio relate to one another.
In the area of transparency, the scores
of the firms within the Hedge Fund Re-
Richard Galanti, Costco
port Card ranged from 8.67 to 3.00. Wellington Management topped investors’ list,
while Angelo, Gordon ranked second. York
and Canyon Capital Advisors tied for third
place. Citadel brought up the rear in the category (with a score of only 3.00).
The grades some firms received for liquidity fell even lower, with Citadel once
again ranking at the bottom of the pack
with an overall score of only 1.33 for the category. Comparatively, Bridgewater received
top marks for liquidity, weighing in with the
category’s highest score of 8.71, while York
ranked second and Adage was third.
When it comes to alignment of inter-
ests—the category investors deemed most
important—Adage led the way with a score
of 9.75, followed closely by Baupost, with a
score of 9.67, and a tie for third place between Taconic and York with scores of 8.83.
Cerberus was the worst performer in the
category, with a score of 4.11.
Adage also nabbed the top spot in alpha
generation in a tie with Baupost, as both
firms had perfect scores of 10. Rounding
out the top three in alpha generation, Elliott ranked third with a score of 9.50, while
Renaissance received the category’s lowest
ranking with a score of 3.80.
Ranked solely on infrastructure, Bain/
Brookside leads the pack, with a score of
9.67, followed closely by Bridgewater with
9.59 and York with 9.50. TPG-Axon got the
lowest score, 5.67.
The decline of the importance of independent oversight, now ranked third, is a sign that
many investors tend to have a short memory
when markets begin to rebound, according
to investors. In that category, Bain/Brookside
led the pack with a score of 9.00, followed by
York with 8.80 and Fortress with 8.60.
Investors identified Cerberus as the
firm with weakest independent oversight
in this year’s rankings, giving the firm a
score of 3.38. AR
Infrastructure
Firm
Unwtd.
Average
1
Bain Capital/Brookside Capital Partners
9.67
2
Bridgewater Associates
9.59
3
York Capital Management
9.50
4*
GoldenTree Asset Management
9.00
4*
Baupost Group
9.00
4*
Canyon Capital Advisors
9.00
4*
Citadel
9.00
4*
Angelo, Gordon & Co.
9.00
Rank
▲Top 5
“It’s a big
institutional
shop that we
consider to be
high quality”
▼Bottom 5
37
Paulson & Co.
7.23
38
Cerberus Capital Management
7.13
39*
Farallon Capital Management
7.00
39*
Harbinger Capital Partners
7.00
39*
SAC Capital Advisors
7.00
42
Appaloosa Management
6.00
43
TPG-Axon Capital Management
5.67
“Their fees are
extremely high
and their transparency poor”
*Asterisk indicates a tie.
Liquidity terms
Firm
Unwtd.
Average
1
Bridgewater Associates
8.71
2
York Capital Management
8.33
3
Adage Capital Management
8.25
4*
Renaissance Technologies
8.00
4*
Canyon Capital Advisors
8.00
Rank
▲Top 5
“They run a
pretty simplistic
strategy and are
more like a longonly manager
than a hedge
fund”
▼Bottom 5
39
Eton Park Capital Management
4.29
40
TPG-Axon Capital Management
4.00
41
QVT Financial
3.25
42
Cerberus Capital Management
1.86
43
Citadel
1.33
*Asterisk indicates a tie.
“Their lockups
put you in a
position where
you have to take
some of it down
when it becomes available
or you’re stuck”
Research & Rankings
Transparency
“It's a very
process oriented
shop and very
institutional
in terms of
transparency,
access and risk
management”
Firm
Unwtd.
Average
1
Wellington Management
8.67
2
Angelo, Gordon & Co.
8.50
3*
York Capital Management
8.33
3*
Canyon Capital Advisors
8.33
5*
Taconic Capital Advisors
8.00
5*
Bain Capital/Brookside Capital Partners
8.00
5*
Harbinger Capital Partners
8.00
5*
Grantham, Mayo, Van Otterloo
8.00
Rank
▲Top 5
▼Bottom 5
39
SAC Capital Advisors
4.50
40
Moore Capital Management
4.43
41
Renaissance Technologies
4.40
42
TPG-Axon Capital Management
4.33
43
Citadel
3.00
“They understand the type
of information
we need to have
from them, and
they’re happy
to provide it”
*Asterisk indicates a tie.
To grade the top hedge funds, AR approached a large group of hedge fund investors, including pension funds, foundations and endowments,
as well as funds of funds and private equity firms. All told, we solicited the opinions of 100 pension and endowment investors who collectively
oversee more than $250 billion in assets. Family offices, funds of funds and private equity firms also participated. Polling was conducted by
phone during the month of June and wrapped up in early July.
Reprinted from the September 2010 issue of AR Magazine. Copyright 2010 by AR Magazine. All rights reserved.
For more information call (212) 224-3675.