Hedge-fund manager John Paulson is one of the biggest beneficiaries of a great rotation from bonds to stocks at the firm led by Anthony “the Mooch” Scaramucci.
Scaramucci’s SkyBridge Capital II LLC, a New York-based advisor that allocates client capital to outside money managers, has been moving cash from income-producing hedge funds, such as those that buy bonds, to event-driven funds that bet on stocks. SkyBridge’s main fund of funds steered $490 million, or 15 percent of its invested capital, to Paulson’s funds in the six months ended Sept. 30, regulatory filings show, as the billionaire manager’s main strategies surged.
With the Federal Reserve preparing to scale back its debt-buying program and the 30-year bull market for bonds showing signs of coming to an end, some institutional investors such as SkyBridge have been shifting away from fixed-income hedge funds. Individuals too are fleeing bonds and piling into stocks, boosting the idea of a great rotation. Bond mutual funds in the U.S. had redemptions of $133 billion in the five months through October while stock funds pulled in $56 billion, according to the Investment Company Institute in Washington.
“Following a couple of years of very strong returns in the credit space, we had a sense in the beginning of the year that had largely played out,” said Michael Rosen, chief investment officer for Angeles Investment Advisors LLC, a Santa Monica, California-based consultant to institutions. Rosen’s firm sought to increase its exposure to equity markets, he said, “whether that was through activist or traditional long-short funds.”
The Standard & Poor’s 500 Index generated a 32 percent total return this year through Dec. 27, including reinvested dividends, while the Barclays U.S. Aggregate Index, a benchmark for bond funds, fell 2.1 percent.
Wall Street strategists continue to debate whether individual investors have begun a major switch from bonds to stocks, a phenomenon that Bank of America Merrill Lynch analysts coined the great rotation in a January 2011 research report. Luke Montgomery, an analyst at Sanford C. Bernstein & Co., wrote last month in a research note that the notion of a great rotation lifting equities is flawed because there’s no automatic correlation between the migration of money and asset prices.
Managers who use equity-hedge and event-driven strategies got net deposits of $9.3 billion and $16.4 billion, respectively, in the first nine months of this year, and relative-value funds, which rely on a range of strategies tied to bonds, took in $20.6 billion, according to Chicago-based Hedge Fund Research Inc. In 2012, relative value dominated with deposits of $41 billion as equity-hedge and event-driven funds lost a combined $17 billion to withdrawals.
The $2.5 trillion hedge-fund business had 27 percent of assets devoted to equity-hedge strategies as of Sept. 30; 27 percent to relative value; 26 percent to the event-driven group; and 20 percent to macro funds, whose managers seek to profit from macroeconomic trends by trading a range of assets.