A quick glance on the Barron’s top 10 performing hedge funds in 2012 on a three-year CAGR return (excluding 2009 performance), reveals the following:
1) Size does matter. The top 10 hedge funds typically have AUM under $12 billion. But it cannot be too small as it will not attract investors and in turn be held captive by its size.
2) Most top performers are confined to fixed income space, particularly asset- and mortgage-backed securities. This reveals that securities that were hammered down will eventually recover back to the mean.
3) Long-only equity strategy is certainly out of place from the top 10. The best-performing long-only equity hedge fund was Cambrian Fund, with a three-year CAGR of 28.38%, ranked 24th.
4) Top performing hedge funds are in constant churn. To quote the most famous short-seller, Jesse Livermore, "You can beat a horse race, but you can't beat the races.” Money cannot be consistently made during the year. This explains some of the notable hedge fund managers/traders' exit as they know they cannot thrive in the current market milieu.
Background on Top 3 Hedge Funds
The best performer returned an average of 78.5% per annum in the three years ending 2011, managed by former head of high yield bond trading at JPMorgan, Christian Zugel. Part of his $418 million Zais Opportunity Fund traded collateralized loan obligations which were badly hit in the aftermath of the subprime mess. He now manages $6.4 billion from the U.S., London and Shanghai.
Next on the list is Metacapital Mortgage Opportunities, managed by former head mortgage trader at Lehman Brothers, Deepak Narula. The fund boasts three-year CAGR of 62% and was founded in 2001.
Third and forth on the list were SPM Structured Servicing Holdings Fund and SPM Directional Mortgage Prepay, respectively, managed by Don Brownstein, a 68-year-old former philosophy professor. The fund only relied on research by a dozen Ph.D.s, had returned an impressive 61.84% per year on average for last three years.
Perhaps equity type and its derivatives hedge fund may thrive in 2013. The asset class has indeed returned lackluster performance in comparison to its peers.