A Bold Few Traders Earn Billions Flouting Rivals
The investors that did the best in 2015 are those that defied conventional wisdom
Most Wall Street traders early this year predicted oil prices would rebound through 2015 and buoy the drillers and equipment providers with close ties to crude. But John Armitage believed more trouble was ahead.
That uncommon conviction and related bearish bets helped his firm Egerton Capital LLP earn $1.5 billion after fees, making Mr. Armitage one of the few to grab a big score in a year that bewildered many on Wall Street.
Many star traders had a rocky year as consensus predictions persistently came up short.
First a move en masse by hedge-fund and private-equity firms into beaten-down junk-rated energy bonds backfired when oil prices fell further. Then the stock of hedge-fund favorite Valeant Pharmaceuticals International Inc. more than halved following controversy about its business model.
Meanwhile, the U.S. Federal Reserve repeatedly pushed back itslong-anticipated interest-rate rise, dragging down funds that specialized in macroeconomic prognostications.
The average hedge fund is down more than 3% this year, according to researcher HFR Inc. It is the latest of several disappointing annual performances for managers who promise to churn out profits even in volatile conditions.
The S&P 500 nears year-end roughly flat following painful swings throughout 2015 and far below the 8.2% growth forecast of bank and money-management strategists polled by researcher Birinyi Associates at the start of the year.
Those who did well defied conventional wisdom. Take Maverick Capital Ltd. founder Lee Ainslie, who formed a contrarian take on Wall Street’s most widely held stock: Apple Inc.
The investor thought Apple was due to disappoint, but he was loath to take a lone stand against the world’s biggest company by market capitalization even as he decided to avoid some shares owned by rival hedge funds beginning in May.
So Maverick’s San Francisco-based technology team found a different way to channel that instinct. Maverick placed bets against makers of parts and accessories for Apple products, including many based in China, people familiar with the matter said.
That stance reaped profits when the country’s economy took a dive this summer and worries mounted about sales growth for Apple products, including the iPhone. Apple shares have fallen 15% in the back half of the year.
The Maverick fund’s 16% gain in the year to date amounts to more than $1 billion in trading profits for 51-year-old Mr. Ainslie, who was initially backed by Texas entrepreneur Sam Wyly.
Other hedge funds now are coming around to Mr. Ainslie’s recent approach by trading against the views of their peers.
“We’re consciously trying to be in areas where there isn’t as much hedge-fund concentration,” said Matthew Iorio, founder of $1 billion hedge-fund firm White Elm Capital LLC.
Mr. Iorio said he is staying away from owning “what’s obvious,” such as big U.S. banks that may benefit from a recent decision by the Federal Reserve to raise interest rates for the first time in nearly a decade.
The direction of oil prices was hardly obvious in early 2015 when the reclusive Mr. Armitage, who rarely speaks in public and prefers to spend his weekends reading company research reports at home, pressed bets against already downtrodden energy stocks that others thought were due to rebound.
He did so because of concerns about emerging markets and the ability of the Organization of the Petroleum Exporting Countries to agree to curb global production.
It turned out to be the right call as commodities continued to crater and companies that provide oil-field services—and had been targeted by Egerton—dived again in value. Mr. Armitage’s $15 billion London firm quietly booked the $1.5 billion profit with its bearish energy wagers and overall pivot to safer markets in the U.S. and Europe.
In currencies, a $5 trillion area that has minted hedge-fund billionaires in decades past, few foresaw the big moves during 2015. But Ray Dalio’s Bridgewater Associates LP, the world’s largest hedge-fund firm, scored a double-digit percentage win early in the year betting against the euro’s drop.
Bridgewater lost money most of the rest of 2015, resulting in a roughly 6% return for its main fund near year-end. That is behind the firm’s usual pace, but ahead of most other peers.
One of the few outsize currency wins belongs to a South Korea-born manager who said she produced a more-than-120% return with bets against the euro, as well as the Australian dollar and Brazilian real as the commodities rout took hold.
Melissa Ko, 48, spoke no English when she moved to the U.S. in her teens. She started her own hedge fund after rising through the ranks at securities firm Bear Stearns & Co. Inc., and continued to invest her own money upon closing the fund two years ago.
This year her gains amounted to $60 million, she said, pushing her personal fortune above $100 million. She used leverage, or borrowed money, of up to eight times to boost returns.
Heading into 2016 she is adding a bearish wager against the Japanese yen and joining peers on a renewed bet against Europe as policy makers’ powers on the continent wane. She said she thinks the euro will fall below parity against the U.S. dollar in the coming year.
“People have become disappointed and soured on the trade,” she said of the of-late reversal for the euro. “But I think it’s just a little blip.”