Hedge Fund Performance in 2006
The best performing hedge funds, like those managed by Kenneth Griffin and Steven Cohen, returned more than 30% in 2006. SAC Capital and Citadel Investment, both Cohen and Kenneth Griffin funds, returned 34% and 30% respectively. At the same time Global Alpha Fund, managed by Goldman Sachs, lost 6% in 2006.
As a whole, hedge funds performed quite well in 2006, rising an average of 13%. This result is a respectable increase over the 9.3% average of 2005.
Hedge Fund Research, which analyzes data on hedge funds worldwide, found that funds favoring investments in developing markets and entities concentrating on takeovers outperformed those that bet their returns on projecting movements in the currency, bond, and commodity markets. The many investors gambling that stocks would decline were generally wrong.
Although changing their focus a bit, hedge funds continue to consist of capital pools attracting primarily high net worth and institutional investors (pension funds, endowments, etc.). At year’s end, hedge funds managed over $1.3 Trillion, attracting over 100 Billion through September 2006, in excess of $60 Billion more than in 2005.
Their goals are to generate profit without respect to market trends, called “absolute returns.” Classically, they charge around 2.0% of all funds managed and garner approximately 20% of all profits generated.
Steven Cohen is a solid example of an effective hedge fund manager. In 1992, he gave birth to SAC Capital Advisors (Stamford, CT). Since then he has built SAC into a major firm, managing around $12 Billion. Among his interesting activities in 2006 was investing in Time Warner, where he also joined in the efforts of investment guru, Carl Icahn, in attempting to break up this media giant.
Equally gifted, Kenneth Griffin, founded Citadel Investment Group in 1990 in Chicago. Beginning with only around $5 Million, he has grown Citadel to almost $12.8 Billion using a wide diversity of investments (stocks, bonds, natural gas, foreign currency, etc.) with great precision.
Late year profits were aided by natural gas investments that Citadel garnered from the recently failed Amaranth Advisors. Profits from energy alone in September equaled 3.0%.
Goldman Sachs, on the other hand, is the largest hedge fund manager in the world, managing over $29 Billion in assets. But they returned only 6.0% in 2006.
Their profitability problems were apparently caused by some wrong decisions on the U.S. Dollar, some Japanese equities, and a poor performance with bond investments. Their flagship fund, Global Alpha, which invests on the projections from computer-based models, recorded 40% returns in the prior year.
The global stock market’s comeback in 2006 allowed macro funds to achieve an average 8.75% return.