Trading the financial markets in 2011 was a humbling experience for many billionaire hedge fund managers. While some hedge fund titans managed to successfully navigate through the year, many big names stumbled. The biggest loser, however, was billionaire John Paulson.
A global economic recovery that many took for granted last winter crumbled in August, with the major stock market indices off their July highs by roughly 15%. Traders who panicked got burned by the volatility that defined the second half of the year, while those who bought each new low were handsomely rewarded. Those that simply stayed the course came out the other end relatively unscathed: the S&P 500 had turned positive by the end of the year and the Dow was up over 5%.
One might expect that the professional money managers piloting the approximately $2 trillion of wealth under the discretion of the world's hedge funds would have provided their wealthy and institutional investors shelter from the storm. Or better yet, reveling in all that volatility, that they would have clobbered the markets. As it turns out, they didn't. The average hedge fund was down approximately 5% net of fees in 2011, making last year the second worst in the history of the industry.
In 2007 John Paulson was the man behind what has been described as the greatest trade of all time. Shorting subprime credit brought Paulson a personal payday of more than $3.5 billion, the largest in Wall Street history to that point. He followed up his banner year with an impressive 2008, producing net returns of 38% for his investors, a figure that seems absurd in a year that the S&P 500 plummeted 39% and the world's institutions scrambled to prevent financial armageddon.
In 2011 Paulson's winning streak came to an abrupt end. His flagship Paulson Advantage fund sank 35.91% net of fees. Paulson Advantage Plus was down a whopping 50.67% after fees. The blow was somewhat softer for Paulson personally; he keeps the vast majority of his personal capital invested in Paulson & Co. funds in gold-denominated shares, an option available to all his clients that relatively few take advantage of. But even with gold-denominated shares hedging his bets, Paulson's net worth took a $3.5 billion hit in 2011.
Paulson was not the only billionaire bust of 2011. Philip Falcone had a rough year as well. Like Paulson, Falcone rose to prominence during the financial crisis, joining the billionaire ranks when his two Harbinger Capital Partners funds returned 114% and 176% respectively in 2007 thanks to timely bets against subprime credit. His flagship fund shed a reported 47% of its value in 2011 after writing down its investment in satellite broadband startup LightSquared. Falcone's net worth was halved along with it. Things are not off to a good start in 2012 either: The FCC revoked the waiver it had granted LightSquared allowing the firm to use satellites to build a terrestrial broadband network and AUM at Harbinger is down to around $5 billion.
Several other big names produced uncharacteristically low returns in 2011 as well. Billionaire Marc Lasry's Avenue Capital Management, which returned 66% in 2009, was reportedly down 10% last year. Fellow billionaire David Tepper's largest Appaloosa Management fund, the $5 billion Palomino, returned about the industry average in 2011: -5.09% net of fees. However, Tepper is reported to be up through the first two months of 2012, and as such, his personal fortune remains largely unchanged by his firm's lukewarm performance last year.
Billionaire Glenn Dubin’s Highbridge Capital Management also underperformed in 2011. Highbridge Capital's flagship fund returned -4.2% net of fees last year while the firm's long/short equity fund fell 12.63% after fees. It wasn't all bad for Dubin, however, Highbridge's Statistical Opportunities fund was a relative winner, achieving a 3.48% net return.
After producing returns of approximately 40% in 2009 and 7.5% in 2010, billionaire James Dinan of York Capital Management posted just the third negative year in his firm's 20 year history in 2011. York's flagship fund was down 5.93% net on the year, while the smaller York Investment and York Select funds returned -7.22% and -17.19% respectively. York European Opportunities was also down through 2011, returning -4.71% net of fees.
Click here to check out 2011's 40 highest-earning hedge fund managers.
