Throughout Market Turmoil, Some Hedge Funds Win

Aug. 16, 2007 — -- Fear on Wall Street these days is being driven in part by news that several well-known hedge funds are in trouble because of investments in subprime mortgages.

But don't blame all hedge funds.

Information about hedge funds is murky at best. But the limited data available indicates that while some funds are plunging, others are skyrocketing. And as a whole, hedge funds in general seem to be doing OK.

The troubled funds that made poor investments in the subprime market are a "smaller percentage of the hedge fund industry than many people might realize," said Corey Goldman, North America editor of Hedge Fund Manager, a weekly newsletter.

Goldman says that some healthy funds are taking advantage of the market downturn, buying up stocks they want at a cheaper price.

Then there are those profiting off the mortgage woes.

"There are certainly some funds out there that are probably looking [at] — if not already taking advantage of — some of the fallout of the subprime area," Goldman added.

It is very hard to get a clear picture of the hedge fund industry. The vast majority of funds don't release information about their performance to the public, which is allowed under Securities Exchange Commission rules.

Several research firms and trade publications track returns, but their data is often weeks — if not months — delayed.

Hedge Fund Research Inc. keeps a database of more than 6,800 hedge funds and maintains indices tracking the various hedge fund sectors from arbitrage to short selling.

But its president, Ken Heinz, said that while most information comes in a few weeks after the close of a month, it can take up to four months to get the final monthly data from each of the funds it tracks.

"The way hedge funds report their numbers, is they do report with a lag," Goldman said. "It is really hard to tell in the last couple of weeks who is doing well and who is doing poorly. We'll probably get a better sense of that in early to mid-September when the August numbers roll in."

So what do those preliminary numbers show?

The funds that Hedge Fund Research Inc. track rose 7.95 percent from January through July 31. In July they rose .45 percent.

Now several of them, along with the rest of the market, are probably — but no one knows for sure — taking a hit in August, which won't be factored into the analysis until sometime in September.

One indicator, Heinz said, is a global hedge fund index that his company calculates daily. It has lost 2.75 percent in value in the first 13 days of August. But it is still up 2.5 percent for the year, down from its 5.25 percent year-to-date gain at the end of July.

Still there are lots of funds that are profiting nicely off the market's woes.

There is actually a group of funds that profit off the market volatility. In July alone, those funds saw a 5 percent to 10 percent increase.

And how about those mortgage hedge funds?

Surprisingly, they were up 3.27 percent for the year. Heinz explained that many of those funds don't invest in subprime mortgages, which are mostly loans given to people with poor credit. Those risky mortgages that are causing a lot of the problems on Wall Street are purchased by other types of funds.

Funds that invest in distressed securities were also having a good year. While they were down 0.4 percent in July, at the end of that month they were up 6.68 percent, according to Hedge Fund Research. These funds typically invest in distressed companies, such as those going through bankruptcies or reorganizations.

Another strong area: emerging markets. These are funds that look to developing countries. They saw an 18 percent year-to-date return by the end of July.

All of this data is at least 2 weeks old and the market has taken some of its largest drops of the year in those two weeks. Will these funds hold up or drop with the rest of the market? Well, simply put: It's too early to tell.