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Some Hedge Funds Prevail, May 4 2000
While other managers suffer, short sellers thrive in April's market volatility
By Staff Writer Jennifer Karchmer NEW YORK (CNNfn)- While Nasdaq volatility toppled two hedge fund leaders and raised questions about the health of the industry, certain hedge funds have actually been thriving during the market's drastic swings.
Hedge funds that short-sell stocks or time the market have in some cases delivered double-digit returns in April -- even as Julian Robertson and George Soros, pillars in the hedge fund community, decided to shut down or cut back on risky strategies.
Many industry hedge fund indexes expect to report their monthly numbers next week. But in advance of those figures, analysts say hedge fund short sellers were some of the top performers last month thanks to the market's roller coaster ride that took the Nasdaq down more than 25 percent in mid-April.
"We were, so to speak, dancing in the aisles," said Brian Rogers of Short Alpha Bear Management, a short selling hedge fund in New York City. "The volatility provides us opportunity. When things get more out of whack, we can profit from it."
Hedge funds, which are unregulated pools of money, use riskier strategies than mutual funds -- such as derivatives and short selling -- to boost returns. By leveraging their investments, hedge funds can boast substantial returns.
Hedge funds require substantial minimum investments that can range from $250,000 to $1 million. Typical shareholders are foundations, pension funds, university endowments and wealthy investors. Short Alpha Bear Management, for example, which manages about $15 million in hedge fund assets, markets itself only to institutions with a minimum investment of $1 million.
Short is sweet
While some strategies such as Soros' macro-style Quantum Fund and Robertson's value-oriented fleet of funds are not faring well, short sellers who bet that a stock price will fall were able to capitalize on market gyrations.
"If short sellers didn't make money (in April), then I don't know what they were doing," said Meredith Jones, director of research at Van Hedge Fund Advisors International Inc. in Nashville, Tenn.
Brian Rogers, portfolio manager of the Short Alpha Bear Fund, reported a 36.93 percent return for April. His portfolio consists mostly of large-cap stocks, but the key to his recent success is buying "distressed" stocks - - companies that fall short of earnings expectations, report cash flow problems or other negative news.
"We go in after the news, after a catalyst has been announced," said Rogers who declined to name any of the fund's holdings. He borrows a stock, hopes that it will fall, and buys it later at a cheaper price to make a profit on the difference. Year to date, the fund is up 72.06 percent, according to Hedgefund.net.
Bets to go down
While Short Alpha Bear is riding the wave of volatility now, it had a tough go of it in 1999 as the Nasdaq was up 86 percent for the year. In fact, short selling hedge funds in general were down 23.7 percent in 1999, according to Van Hedge Fund Advisors Index.
But Rogers, who started the fund in July 1999, thinks his short-selling strategy is well poised with the market, which he expects to go down.
"We've seen basically a 20-year bull market which is the longest this country has seen," he said. "Usually a bull market lasts 15 to 18 years, so I think we're due for sideways to downward action."
Market volatility also played into the hands of Michael Sapourn, who manages about $85 million in hedge fund assets in Bethesda, Md.
Sapourn, a market timer who tries to take advantage of daily market movements, is either fully invested in securities when the market is up, or in cash, such as money market funds, when the market is moving down.
"Market timers did well because they avoid a lot of the downdrafts of the market," he said. Sapourn said his two domestic hedge funds returned up to 2.5 percent for April. "We're 100 percent invested in money market funds in big down days based on our signals," he said.
On Wednesday, for example, as investors were dumping technology stocks sending the Nasdaq down, Sapourn said his market-timing model gave him the red flag to stay out of the market.
-- Click here to send email about this story to Staff Writer Jennifer Karchmer.No Bear HeavenBARRON’S
Up and Down Wall Street
Alan Abelson, May 18 2000
Thus spake the other sage of Omaha, Charles Munger, vice chairman of Berkshire Hathaway, at that renowned company's recent annual hootenanny for shareholders. Mr. Munger's culinary observation, so reports Jim Grant in the latest Grant's Interest Rate Observer, was, in fact, a straight-foward summation of his investment views.
His good buddy, Warren Buffett, was similarly disposed to mince words in dissecting current investment fashions. He cited the transformation of the stock market into a casino (Donald Trump immediately threatened to sue for giving casinos a bad name) and remarked on the increasing resemblance of investor behavior to Pavlov's dog (which, a pit bull, as we recall, was conditioned to salivate wildly and make a mad dash for the chow bowl every time old Pavlov rang a bell).
Frankly, it came as a great shock to us that Mr. Buffett does not envision the Dow Jones Industrial Average reaching 36,000 anytime soon. That, at least, is what we infer from his expectation that owning equities won't be "very exciting over the next 10-15 years."
Attendance at Berkshire's shareholder shindig was off some this year, no doubt reflective of its stock's dismal decline. Mr. Buffett gave himself a "D" for performance, but he shouldn't take the odd bad year to heart; as we've noted before, only popes and financial writers are infallible.
This market unquestionably has been cruel to the virtuous and the vile alike. With admirable impartiality, it has bludgeoned those who foolishly embraced technology stocks (George Soros) and those who sedulously avoided technology stocks (Julian Robertson). It has, more recently, abruptly turned on its most ardent devotees, savaging with a deplorable lack of gratitude day-traders, momentum players, dippy buyers and the rest of the manic menagerie.
Paradoxically, even the chronic bears in the past couple of months, when you'd have sworn they'd be in bear heaven, failed to fatten on the plunge in equity prices. A tally of 10 leading short-selling hedge funds, for example, showed seven were down for the year, with losses ranging to nearly 13%. And in the latest month, when stocks were on the skids pretty much across the board, six of the 10 still were unable to show a gain.
At first blush, it might seem the short-sellers had been so traumatized by years of a raging bull market that they'd forgotten the rudiments of their sorrowful trade. But in truth, most of the breed had long ago decided they just couldn't take it any more and, often covertly, leavened their portfolios with longs. So when the tide finally turned, irony of ironies, they found themselves in the wrong boat.
Clearly, it's getting increasingly tough for investors, whatever their persuasion, size or stance, to make money. But isn't that as good a definition as any of a bear market?
Now, there's always an exception that proves even the most unambiguous rule. And wouldn't you know, that even applies to short-sellers. For as it happens, one of the professionally bearish brood is having a bang-up year. And the fund, if you're curious, is called Short Alpha Management.
It's run by a fellow named Brian Rogers, who's a refugee from the junk-bond business. He has something like $20 million under management and, in common with most "dedicated" short funds, Alpha's investors are rich folks and institutions that have this strange notion that bull markets don't go on forever, and they crave a little insurance just in case they're right.
So far this year, Short Alpha is up a tidy 70% or so. Launched in the late summer of '97, it wound up that year with a gain of over 27%, and in 1998 was really cooking, posting a rise of 77%. (All these numbers are "net" -- after, that is, Brian and his partner take their 20%-plus cut.) Last year, alas, Short Alpha came up short, big-time-it was down 41%.
Pure and simple, Brian sighs, the portfolio got killed the last two months of the year, when the market had what he calls a "blow-off rally," a kind of culmination, as he sees it, of the extraordinarily long and powerful bull market. It was a year, he reminds, in which Nasdaq was up a mere 85% or thereabouts. The rules of engagement mandate that Alpha's investors must be made whole before the meter starts running again for Brian and partner. As noted, last year's steep loss has been handily erased with 2000 still weeks shy of being five months old.
A mite ruefully, Brian says he learned something from the bruising he took last year (which makes him a bit of an anomaly on Wall Street, since most everyone else, long or short, already knows it all). And he has put that recent, rather costly education to good use, he says, fine-tuning his investment approach. The changes seem to have helped, since he had a solid February, when a roaring market was death on most short-sellers.
His system (we think it's significant that race-track habitues and stock-market pros typically both have "systems") is a mixture of the technical and the fundamental. As Brian rightfully points out, few hedge-fund operators and even fewer of those who accentuate the negative are technically oriented. He finds, however, that a stock's price and volume patterns are extremely valuable in picking candidates for short sales.
The fundamental stuff largely consists of the usual valuation measures such as price times earnings and, most important, price times sales. But he also keeps an eye cocked for problematic accounting, mergers that aren't working out or something that doesn't pass the smell test.
He finds his technical analysis essential for timing his shorts. He relies heavily on it to spot the telltale signs that a likely short is poised to enter the one-to three-month period in which a stock typically suffers the fiercest part of its fall.
Brian is refreshingly different from most of the grizzlies we've come across in that he doesn't think it's necessary to demonize the companies whose stock he's shorting. On the contrary, often as not they're good companies whose shares are selling way beyond their value. For example, he shorted Motorola at 117-118 -- not because he thought the company was headed for disaster but rather because he felt investors, in rushing to bid up the stock, were ignoring some potential problems. Motorola's recent bad spill more than justified that judgment.
When we pressed him for a name he considers a ripe short, he mulled a bit and offered Starbucks. He has nice things to say about the company and its management. But he also believes the stock to be quite vulnerable.
Starbucks, in Brian's view, is headed for slower growth. Indeed, same-store sales gains, he reports, have lagged behind Street expectations. To him, it's a classic case of a company that has exploited most of the choice cities and locations and now has to push into less inviting spots. He also espies rising cost pressures.
The stock, at 32 and change, is down from its high of 45 in March but up from its yearly low of under 20. The consensus estimate is 71 cents a share in the current fiscal year, ending September, and 91 cents next fiscal year. So it's selling at around 45 times this year's earnings and some 3 1/2 times sales.
To Brian, those are extravagant multiples and he sees the market inevitably coming around to that conclusion. His downside target is around 20.
Again, no big knock on Starbucks. He loves the coffee but not the stock.
OBSERVER
The Short-Sellers’ Ball: Not Everyone Cried on Freaky Friday
Ryan D’Agostino, May 24th 2000
In the midst of the massive stock market collapse on the afternoon of Friday, April 14, Brian Rogers, a 36-year-old hedge fund manager, stepped outside the small office he shares with his partner, Adam Weiss, at 230 Park Avenue, and encountered the walking dead.
Two-thirty Park is one of those buildings that swarm with hedge fund managers-a latter-day version of the old writers’ bungalows on the studio lot. In the hallway that day, as the major indices plummeted, money managers milled about, looking stunned. They were getting shellacked. And seeing Mr. Rogers away from his turret, they assumed he was, too.
But he was having one of the best days of his life.
“They want a shoulder to cry on, and I really don’t know what to say,” Mr. Rogers said.
Mr. Rogers manages the Short Alpha Bear fund, a pool of more than $10 million with which he places bets against stocks he thinks are going down. Mr. Rogers is a short-seller. He borrows stock he thinks is headed for a fall, then sells the stock and waits for the decline. Then he buys back the stock at a lower price, repays the loan and profits from the difference…
But in recent weeks, and especially on Friday, he has cleaned up. As of the evening of April 14, his fund was up 52 percent on the month, he said-this after reporting a first-quarter gain of 25 percent.
Mr. Rogers is not alone, but he is pretty close. The stunning gains in the Nasdaq in 1999 and the first two months of this year weeded out all but the most nimble and well-capitalized market skeptics.
“There aren’t very many short-sellers left,” said Barry Colvin, a director of research at Tremont Advisers, a hedge fund consultant. They either went out of business or changed their strategy to get with the times. By the time Black Friday capped weeks of mayhem on the Nasdaq, there were few left who could really enjoy it.
But there were a few, and what fun they had, savoring that rare chance to snicker at the New Economy evangelists. The annoying cocktail-party gloaters suddenly found themselves deluged with margin calls and tax bills. Pain, shmain. For the bears, it was sweet! Even if the short-sellers’ moment of vindication was fleeting-the markets rebounded sharply on April 17 and on the morning of April 18-it gave them a taste of what life could be like if the market were to revert to its pre-Internet ways-rational, plodding and rewarding to those with an intellectual cast of mind.
In the hallway on Friday, Mr. Rogers had to resist the urge to gloat.
“I don’t enjoy watching other people suffer,” Mr. Rogers said after the close of the market on April 17. He was sitting with Mr. Weiss in their small office, under a horizontal poster of the Manhattan skyline at twilight. He was wearing khakis and a blue button-down shirt. He had a goatee. “But at the same time, I’ve always thought it was important to follow my own logic with the market, the way I see it. Granted, if we do well, it might be at the expense of others, but it works both ways. It’s not like I can control it.”
A little smirk crept across his lips.
“When we do well, it usually means about 95 percent of the guys out there are doing really poorly,” Mr. Weiss said. “So we’re always in the minority, whether we’re doing well or not. When other hedge fund managers are getting their butts kicked, like they did last week, they want some company. Misery loves company. So we just have to keep our smiles to ourselves.”
“Of course, some people are saying, ‘Wait! The market’s going back up!'” Mr. Rogers said. “But I think by the end of the week it will be clear that the thing has changed. In my opinion, we’re no longer in a bull market. A 20-year event just changed. Wall Street is trying to show confidence in the face of a difficult battle. But I don’t think anyone’s going to believe it.”
Short Alpha is a rare breed: 100 percent short. Mr. Rogers has been investing using the Short Alpha model since 1997. His first year, he returned 43 percent. In 1998 he soared to 118 percent, but last year he was down 38 percent. Rich people won’t let you lose their money for too long before they take it away. Just look at what happened to Julian Robertson, the hedge fund master whose adherence to the recently outmoded principles of value investing caused him to lag way behind the market. He closed his Tiger funds in March. His timing was unfortunate. For the first time in years, the market looks like it may begin acting like the market Mr. Robertson grew up with.
“The bulls in this market did not believe that we would get to the type of sell-off period that happened on Friday and that’s happening right now,” Mr. Rogers said. “The volatility was an unexpected event, something they said couldn’t happen. Some of these stocks are down 50 and 70 percent, and that wasn’t the plan. At every opportunity, I had been telling people that I disagree, that there would be a big sell-off. So, yeah, I think there’s some vindication here.”
Filed Under: Real Estate, Julian Robertson, Brian Rogers, Adam Weiss, David Tice