A bad summer for hedge funds

The summer of 2007 won't be a happy memory for many hedge fund companies. At least a dozen closed funds or halted redemptions when the credit markets seized up.

The Boston-based Sowood Capital Management, run by Jeff Larson, a former Harvard University endowment manager, lost $1.6 billion, or about 60 per cent of its value, and is returning its remaining cash to investors.

The New York-based Goldman Sachs' Global Alpha fund, meanwhile, lost 33 per cent of its value this year till August 31.

Many hedge fund managers were able to sidestep the kind of blow-ups that have afflicted the industry this year. Some of those managers are featured in Bloomberg News reporter Katherine Burton's new book, Hedge Hunters, to be published on November 1 by Bloomberg Press.

The book uncovers the secrets of some of the most successful traders as they describe the biggest challenges they face, how they enter and exit a trade and how they became veterans in an industry in which mere survival is an achievement.

They also name some of the most talented managers in the game. In this excerpt, Burton talks to Craig Effron, founder of New York-based Scoggin Capital Management LP.

A Nymex Mindset
It's been two decades since Craig Effron traded gold, silver and crude oil at the New York Mercantile Exchange, but the lessons he learnt in 10 years in the pits, where decisions are made at a manic pace, still dominate his approach to money management.

Effron's $3.25 billion hedge fund, Scoggin Capital Management LP, buys and sells stocks and bonds of companies that are merging, spinning off units or going through financially tough times.

From November 1988, when he started the fund, to August 1, Effron produced average annual returns of 18.2 per cent after fees, using no borrowed money.

He had only one loss-making year, 2002, when he was down 1.3 per cent. His returns are not correlated to the stock market. In 90 per cent of the cases, his funds made money when the Standard & Poor's 500 Index, the benchmark US stock index, was down.

"I'm a risk manager, which I believe is more important these days than being an analyst,'' Effron said.

That's because Effron's approach hinges on responding to change. The investment world gets smaller every day - and faster.

Responding to Change
Events that seem unconnected drive the markets to move in sympathy. When Russia devalued its currency in August 1998, the S&P 500 tumbled 13 per cent in the following two weeks. "Nowadays, cause and effect are much more instantaneous,'' Effron pointed out. "It's much more like commodities trading.''

Everything about Effron has its accent on the present. His manner is definitely more akin to that of a regular guy than an Ivy League big shot. Although Effron, 48, got his undergraduate degree at the Wharton School of the University of Pennsylvania, he always counted on becoming an attorney. "It's all been happenstance,'' he said of his career path.

A Job on the Street
The first of the chance occurrences came in 1981 and was born of a hitch in Effron's plans for a legal career. He had been placed on the waiting list at New York University's law school, and his parents suggested that he find a job on Wall Street for a year before reapplying. Not many wanted to work on the Street then - the country was in the middle of a recession - and he readily got a job at brokerage firm EF Hutton.