ARTICLE INTERVIEW: Beryl's Radonjic quoted in The Wall Street Journal, "Hedge Funds Hurt by Volatility" April 29, 2012

By JULIET CHUNG 

Stock-trading hedge funds looking to extend their first-quarter rebound ran into a familiar adversary this month: a nervous market.
 
Amid renewed concerns over Europe's debt crisis, the strength of the U.S. economy and doubts about China's growth, volatility returned in early April — hurting some hedge funds' performance.
 
The dip was brief, to be sure, and the markets have calmed since then. 
 
Still, the downdraft is a reminder that funds betting that stocks will rise or fall based on valuation or other fundamentals can get thrown for a loop when markets turn choppy—as some investors are expecting later this year. 
 
"I think the party's over in terms of returns," said Vidak Radonjic of Beryl Consulting Group LLC, which advises investors on hedge funds. "These guys didn't fare well last year, and they are not going to change overnight."
 
April rode in like a lion, with six triple-digit moves in the Dow Jones Industrial Average before April 17— as many as in the three previous months combined. 
 
That, in turn, hurt some hedge funds. All told, U.S.-based funds that bet on and against stocks had a median return of -0.92% from April 1 through April 13, according to data from Morgan Stanley's MS -1.51%prime brokerage, after having returned 1.16% in March. 
 
Returns improved as the markets stabilized. Through April 26, the median return was down 0.03% for the month.
 
Last year, when the market swung wildly but ended the year relatively flat, equity hedge funds turned in one of their worst annual performances of the past decade. 
 
They were down about 8.4% in 2011, on average, according to Hedge Fund Research Inc., the worst since 2008, when they fell almost 27%. 
 
As the markets calmed in the first quarter of this year, the funds bounced back, turning in their strongest performance in the period in a decade — a 7.3% gain. 
 
Lee Ainslie III's Maverick Capital Ltd., which has more than $9 billion in assets, and Mark Kingdon's $2.9 billion Kingdon Capital Management LLC suffered double-digit losses last year but saw big gains in the first quarter. 
 
Maverick lost almost 15% in 2011, Mr. Ainslie's second down year in 16 years. But it gained more than 13% in the first quarter.
 
Kingdon Capital, which has produced double-digit gains for most of the firm's 28 years, slipped 18% last year but closed the first quarter up 12%.
 
Violent swings in the market can leave managers scrambling to adjust portfolios. Last year, many raced to scale back their risk taking in August and September as the markets plummeted amid concerns about Europe.
 
Then some managers missed out on October's rally, one of the best months for stocks in decades.
 
Volatility also can hurt hedge funds' returns by increasing the "correlation" among stocks, or the tendency for stock prices to move in lockstep, regardless of their underlying fundamentals. The broader ebb and flow of the market tends to overwhelm what ordinarily might drive stock prices, such as price-to-earnings ratios.
 
Last year "was a really tough year to navigate; you had to have some sort of view on Europe, and that was tough for us," said hedge-fund manager Whitney Tilson of $260 million T2 Partners, which was down almost 23% last year.
 
In the first three months of 2012, the New York-based "long-short" fund, which seeks to profit when some stocks go up and other stocks go down, gained 24%, its best quarter in more than 13 years.
 
Investors can expect more unpredictability going forward, said Jim Strugger, a derivatives strategist who studies volatility at institutional equity research firm MKM Partners.
 
According to his analysis, the U.S. stock market tends to fluctuate between periods of high volatility every several years. The market entered its most-recent choppy phase in July 2007 and might remain in this cycle until at least the end of this year, he said.
 
"This little run-up we've had in volatility in the last few weeks is an early warning sign" of more to come," he said. "We're bullish, but we think there's an elevated degree of risk now."
 
Mr. Strugger looks to the CBOE Market Volatility Index, or VIX, to define periods of high- or low volatility. The VIX, which uses option prices to measure investors' expectations for future swings, typically ranges between 10 and 20 when markets are calm, he said. When the benchmark consistently tops 15, as it has since 2007, they aren't. 
 
Some managers seemed to have learned from their experiences last year and have put in place hedges in advance of turmoil, said Robert Discolo of PineBridge Investments, which invests about $3.3 billion for clients in hedge funds.
 
A mid-April meeting with team members to go through the firm's portfolio showed no big selloffs or losses among the managers they are invested in, he said.
 
"Things seem to be holding up OK," Mr. Discolo said. "They're much better than they were last year, when we had the lows in the market."
 
Write to Juliet Chung at juliet.chung@wsj.com
 
LINK: http://online.wsj.com/article/SB10001424052702304868004577374193317431790.html