The message of this month’s cover story might well be “Nobody’s perfect.” Not even John Arnold. The energy trading whiz kid broke his winning streak last year, posting a near-4% annual loss. Is the former Enron trader really a genius or was he merely clever at exploiting a game—one that has just changed?
Structural and regulatory changes are now forcing Arnold, like many a hedge fund trader before him, to move out of his comfort zone. His Centaurus Advisors is buying hard assets, a vertical integration move that some liken to creating a mini-Enron. That effort has so far yielded mixed results. Arnold may well pull off the transition, but one could build a graveyard of hedge funds that have taken detours with disastrous effects. The demise of one of them—Amaranth Advisors—at Arnold’s more skillful hands cemented the young billionaire’s trading fame.
Few would bet against Arnold. However the hunt is finally on again on for new stars, as the results of our annual new funds survey indicates. After a two-year drought, new funds are on the rise again. Launches garnered more than $17 billion in 2010, a 17% gain over the prior year. That total is still less than half the amount amassed in 2004, the record year for hedge fund startups. But a number of new funds announced in January—some coming off bank proprietary desks that the Volcker rule is shutting down—could well turn 2011 into another record year.
After a bumpy ride, last year turned into a relatively good one for most hedge fund managers. The brand name hedge funds AR tracks turned in a median 11% gain. In retrospect, shorting the euro, going long emerging markets and riding the Fed’s reflation might seem like no-brainers.
But Centaurus wasn’t the only big name to get the markets wrong. Such stars as D.E. Shaw, Brevan Howard Asset Management and Viking Global Investors barely squeaked out gains.
As we start 2011, with sovereign debt uncertainties in Europe and a tepid recovery in the U.S., it’s worth remembering that the future is never that obvious—except when seen through the rear-view mirror.
