THE WORLD’S RICHEST HEDGE FUNDS

WINNING STRATEGIES

BEST RETURNS

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Fannie mae and Freddie mac have a friend on West 57th street. that’s the New York address of metacapital man-agement lP, the hedge fund founded by Deepak Narula. The much-maligned mortgage aggre-gators were taken over by the federal government in 2008 and have since absorbed $140 billion in taxpayer bailout money. The head of the House Financial Services Committee wants to abolish them. Yet they still own or guarantee more than half of all U.S. housing loans—and for that reason, the administration of President Barack Obama isn’t about to let them go belly up.

Narula, 50, has used Fannie and Freddie to build the world’s most-suc-cessful hedge fund. His Metacapital Mortgage Opportunities Fund, which invests heavily in agency mortgages, returned 37.8 percent in the first 10 months of 2012, putting it at the top of the BloomBerg markets list of the 100 best-performing hedge funds managing $1 billion or more. That comes on top of a 23.6 percent return in 2011. The fund was up 520 percent since the Mortgage Opportunities

fund started trading in July 2008.Three of the top five funds in the

BloomBerg markets list invested in mortgage securities, and two of them are run by Minnetonka, Minnesota–based Pine River Capital Manage-ment LP. Betting on mortgage securities outpaced every other strat-egy, with an average return of 20.2 percent, against an industry average of just 1.3 percent, according to data compiled by Bloomberg.

The most-profitable fund in the

first 10 months of 2012 was Steve Co-hen’s SAC Capital International, which earned $789.5 million for its managers. In November, the U.S. Se-curities and Exchange Commission notified Cohen’s $14 billion firm, Stamford, Connecticut–based SAC Capital Advisors LP, that it was con-sidering suing it for civil fraud re-lated to insider trading. (See page 36.)

Narula’s edge in 2012 was in read-ing the tea leaves of Washington pol-icy makers. Toward the end of 2011,

Pine River has three funds in the top 20. Portfolio manager aaron Yeary runs the No. 19 fund.

Fe b r u a r y 2 0 1 3 b lo o m b e r g m a r k e ts 23

Fund, Manager(s) management Firm, Location strategyA s s e t s , i n

b i l l i o n sY t D t o tA l

r e t u r n2 0 1 1

r e t u r n

1 Metacapital Mortgage Opportunities Deepak Narula Metacapital Management, u.s. Mortgage-backed arbitrage $1.5 37.8% 23.6%

2 Pine River Fixed Income Steve Kuhn Pine river Capital Management, u.s. Mortgage-backed arbitrage 3.6 32.9 4.8

3 CQS Directional Opportunities Michael Hintze CQs, u.K. Multistrategy 1.5 28.9 –10.4

4 Pine River Liquid Mortgage Steve Kuhn, Jiayi Chen Pine river Capital Management, u.s. Mortgage-backed arbitrage 1.1 28.0 7.2

5 Odey European Crispin Odey odey Asset Management, u.K. Macro 1.8 24.1 –20.3

6 Marathon Securitized Credit Bruce Richards, Louis Hanover Marathon Asset Management, u.s. Asset backed 1.2 24.0 – 4.2

Palomino David Tepper Appaloosa Management, u.s. Multistrategy 4.9 24.0 –3.5

8 BTG Pactual GEMM Team managed btG Pactual Global Asset Management, u.s. Macro 3.6 23.1 3.4

9 Third Point Ultra Daniel Loeb third Point, u.s. Multistrategy 1.3 22.1 –2.3

10 Omega Overseas Partners A Leon Cooperman omega Advisors, u.s. Long/short 1.4 21.7 –1.4

11 Seer Capital Partners Philip Weingord seer Capital Management, u.s. Asset backed 1.2 21.6 2.1

12 Tiger Global Feroz Dewan, Chase Coleman tiger Global Management, u.s. Long/short 6.0 21.0 45.0

13 Eminence Ricky Sandler eminence Capital, u.s. Long/short 3.0 20.9 1.6

14 Jana Master Barry Rosenstein, David DiDomenico Jana Partners, u.s. Event driven 3.8 20.4 –2.1

15 Structured Servicing Holdings William Mok structured Portfolio Management, u.s. Mortgage-backed arbitrage 1.9 20.3 19.6

16 Citadel Tactical Trading Team managed Citadel Advisors, u.s. Long/short 1.0 20.0 38.0

17 Viking Long Andreas Halvorsen Viking Global investors, u.s. Long biased 1.7 19.4 –0.1

18 Cerberus RMBS Opportunities Steve Feinberg Cerberus Capital Management, u.s. Distressed 1.7 19.0 NA 1

19 LibreMax Partners Greg Lippmann libreMax Capital, u.s. Structured credit 2.3 18.5 2.0

Pine River Aaron Yeary Pine river Capital Management, u.s. Multistrategy 1.6 18.5 5.7

21 Litespeed Master Jamie Zimmerman litespeed Management, u.s. Distressed 1.7 18.1 4.4

22 AHL Evolution Timothy Wong Man investments, u.K. Managed futures 1.9 18.0 10.5

Citadel Kensington/Wellington Team managed Citadel Advisors, u.s. Multistrategy 7.0 18.0 20.0

24 Canyon Balanced Joshua Friedman, Mitchell Julis Canyon Capital Advisors, u.s. Distressed 1.9 17.7 – 4.5

25 Contrarian Capital One Jon Bauer, Janice Stanton Contrarian Capital Management, u.s. Distressed 2.1 17.6 –1.3

26 DoubleLine Opportunistic Income Jeffrey Gundlach, Philip Barach Doubleline Capital, u.s. Fixed income 2.3 17.4 20.7

Redwood Offshore Jonathan Kolatch redwood Capital Management, u.s. Distressed 2.6 17.4 –2.0

28 One William Street Capital Partners David Sherr one William street Capital Management, u.s. Asset backed 2.2 17.1 – 4.3

l a r g eH e D g e F U N D S

1 0 0 t o P -P e r f o r M i n G

24 b lo o m b e r g m a r k e ts Fe b r u a r y 2 0 1 3

1 0 0 t o P - P e r f o r M i n G l A r G e H e D G e f u n D s

29 Cevian Capital II Lars Forberg, Christer Gardell Cevian Capital, sweden Activist $6.9 16.8% –9.9%

Heliant David E. Shaw D.e. shaw & Co., u.s. Macro 1.7 16.8 9.2

31 Autonomy Global Macro Robert Gibbins Autonomy Capital, u.s. Macro 2.9 16.0 13.6

Maverick Lee Ainslie Maverick Capital Management, u.s. Long/short 10.0 16.0 –15.8

33 SPM Core William Mok structured Portfolio Management, u.s. Mortgage-backed arbitrage 1.7 15.7 23.7

34 Canyon Value Realization Joshua Friedman, Mitchell Julis Canyon Capital Advisors, u.s. Multistrategy 8.0 15.6 – 4.7

35 MKP Credit Patrick McMahon, Anthony Lembke MKP Capital Management, u.s. Credit 2.0 15.4 –5.1

36 GoldenTree Credit Opportunities Steven Tananbaum Goldentree Asset Management, u.s. Credit 1.5 15.3 0.7

37 Drawbridge Special Opportunities Peter Briger Jr., Constantine Dakolias fortress investment Group, u.s. Credit 4.9 15.1 10.9

38 Silver Point Capital Edward Mule silver Point Capital, u.s. Distressed 6.8 15.0 6.1

York Credit Opportunities William Vrattos, James Dinan, Daniel Schwartz York Capital Management Distressed 4.2 15.0 –1.4

40 Russian Prosperity Ivan Mazalov, Alexander Branis Prosperity Capital Management, russia Emerging-markets equity 1.3 14.9 –18.0

41 CQS ABS Simon Finch (formerly Alistair Lumsden) CQs, u.K. Asset backed 2.3 14.3 0.7

42 Third Point Offshore Daniel Loeb third Point, u.s. Multistrategy 4.9 14.1 –0.1

43 All Weather 12% Ray Dalio bridgewater Associates, u.s. Macro 6.6 14.0 19.5

Citadel Global Equities Team managed Citadel Advisors, u.s. Long/short 2.0 14.0 21.0

Marathon Special Opportunity Bruce Richards, Louis Hanover Marathon Asset Management, u.s. Multistrategy 1.0 14.0 – 4.8

46 OxAM Quant Fund Andre Stern, Steve Mobbs, Steven Kurlander oxforD Asset Management, u.K. Quantitative 3.8 13.7 23.5

Spinnaker Global Emerging Markets Bradley Wickens spinnaker Capital, u.K. Emerging-markets debt 1.4 13.7 –9.3

48 Halcyon Asset-Backed Value Joseph Wolnick, Joseph Godley, James Coppola Halcyon Asset-backed Advisors, u.s. Asset backed 2.5 13.4 4.1

Oculus David E. Shaw D.e. shaw & Co., u.s. Macro 9.5 13.4 18.0

Perry Partners Richard Perry Perry Capital, u.s. Multistrategy 4.8 13.4 –7.1

51 BlueMountain Credit Alternatives Andrew Feldstein blueMountain Capital Management, u.s. Credit 5.1 13.3 3.6

52 Ares Enhanced Credit Opportunities Seth Brufsky, Americo Cascella Ares Management, u.s. Fixed income 2.4 13.2 8.0

Cerberus Institutional Partners Series IV Steve Feinberg Cerberus Capital Management, u.s. Distressed 7.6 13.2 1.3

54 Green HG Luis Stuhlberger Credit suisse Hedging-Griffo, brazil Macro 1.4 13.1 –5.7

55 Vertex John Thiessen, Tim Logie Vertex one Asset Management, Canada Distressed 1.0 13.0 –20.0

56 Blue Harbour Strategic Value Partners Clifton Robbins blue Harbour Group, u.s. Activist 1.1 12.9 3.3

57 Viking Global Equities Andreas Halvorsen Viking Global investors, u.s. Long/short 16.3 12.7 7.6

58 Brevan Howard Credit Catalysts David Warren DW investment Management, u.s. Credit 3.0 12.6 1.2

59 Fortress Macro Adam Levinson, Michael Novogratz fortress investment Group, u.s. Macro 1.5 12.5 –9.5

60 BlackRock Fixed Income Global Alpha Tim Webb blackrock Alternative investors, u.s. Fixed income 3.5 12.3 20.2

61 Beach Point Total Return Carl Goldsmith, Scott Klein beach Point Capital Management, u.s. Distressed 1.4 12.1 –1.0

QVT Overseas-B Daniel Gold QVt financial, u.s. Multistrategy 2.4 12.1 5.5

63 Pelham Long/Short Ross Turner, Hadyn Cunningham Pelham Capital Management, u.K. Long/short 2.0 11.9 –10.4

64 Brummer & Partners Zenit Per Josefsson, Svante Elfving Zenit Asset Management, sweden Long/short 1.5 11.8 – 4.0

Fund, Manager(s) management Firm, Location strategyA s s e t s , i n

b i l l i o n sY t D t o tA l

r e t u r n2 0 1 1

r e t u r n

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65 Egerton European Dollar John Armitage egerton Capital, u.K. Long/short $1.5 11.4% –5.0%

Greenlight Capital David Einhorn Greenlight Capital, u.s. Long/short 7.8 11.4 2.9

67 Rimrock High Income Plus Dave Edington rimrock Capital Management, u.s. Fixed-income arbitrage 1.2 11.2 7.5

68 AG Super Michael Gordon, David Kamin Angelo Gordon & Co., u.s. Multistrategy 3.1 11.0 –0.8

GSO Special Situations Overseas Louis Salvatore, Michael Whitman Gso Capital Partners, u.s. Distressed 1.8 11.0 8.0

Pimco Absolute Return IV Bill Gross Pimco, u.s. Long/short 2.7 11.0 1.8

Providence MBS Russell Jeffrey Providence investment Management, u.s. Mortgage-backed arbitrage 1.8 11.0 25.1

72 New Mountain Vantage Daniel Riley, David Frost new Mountain Capital, u.s. Long/short 1.6 10.8 12.0

73 York Total Return Jeffrey Weber, Marc Helwani York Capital Management, u.s. Multistrategy 1.5 10.7 –7.2

74 Elliott Associates Paul Singer elliott Management, u.s. Multistrategy 7.5 10.6 4.0

Hudson Bay Sander Gerber Hudson bay Capital Management, u.s. Multistrategy 1.5 10.6 4.3

76 GoldenTree Master Steven Tananbaum Goldentree Asset Management, u.s. Credit 2.9 10.5 –0.3

Hayman Capital Master Kyle Bass Hayman Capital Management, u.s. Event driven 1.0 10.5 2 1.8

King Street Francis Biondi, Brian Higgins King street Capital, u.s. Event driven 10.4 10.5 –1.6

Paulson Enhanced John Paulson Paulson Partners, u.s. Merger arbitrage 2.0 10.5 –21.6

80 Loomis Sayles Credit Long/Short Team managed loomis sayles & Co., u.s. Credit 1.1 10.4 –0.8

81 Columbus Hill Kevin Eng Columbus Hill Capital Management, u.s. Multistrategy 1.2 10.3 – 4.5

Strategic Value Restructuring Victor Khosla strategic Value Partners, u.s. Distressed 1.4 10.3 –11.3

83 Discovery Global Opportunity Robert Citrone Discovery Capital Management, u.s. Macro 6.3 10.2 3.6

84 Halcyon Partners Offshore John Bader, Kevah Konner Halcyon Asset Management, u.s. Multistrategy 1.5 10.1 –5.9

Lansdowne Developed Markets Peter Davies, Stuart Roden lansdowne Partners, u.K. Long/short 6.9 10.1 –20.4

86 Avenue International Shawn Foley, Rob Symington Avenue Capital Group, u.s. Distressed 2.0 10.0 –12.9

Highside Capital Partners Lee Hobson Highside Capital Management, u.s. Long/short 1.0 10.0 –1.3

SAC Capital International Steve Cohen sAC Capital Advisors, u.s. Long/short 9.0 10.0 8.0

Senator Global Opportunity Alex Klabin, Douglas Silverman senator investment Group, u.s. Multistrategy 3.7 10.0 –0.7

Visium Balanced Jacob Gottlieb Visium Asset Management, u.s. Long/short 2.6 10.0 2.1

91 Aristeia Partners Anthony Frascella, William Techar Aristeia Capital, u.s. Credit 1.5 9.8 2.4

92 Spinnaker Global Opportunity Jorge Benjamin Rosas, Marcos Lederman spinnaker Capital, u.K. Emerging-markets debt 1.4 9.6 –11.8

93 OZ Master Daniel Och och-Ziff Capital Management Group, u.s. Multistrategy 21.4 9.5 –0.6

94 Double Black Diamond Clint Carlson Carlson Capital, u.s. Multistrategy 4.4 9.4 –0.8

Monarch Debt Recovery M. Weinstock, A. Herenstein, C. Santana Monarch Alternative Capital, u.s. Distressed 1.3 9.4 –0.5

96 Elliott International Paul Singer elliott Management, u.s. Multistrategy 13.4 9.3 3.8

Passport Global Strategy John Burbank II Passport Capital, u.s. Long/short 1.3 9.3 –18.7

98 M. Kingdon Offshore Team managed Kingdon Capital Management, u.s. Long/short 1.2 9.1 –18.0

99 Two Sigma Compass Enhanced U.S. Team managed two sigma investments, u.s. Managed futures 2.6 9.0 3.7

York Capital Management James Dinan, Daniel Schwartz York Capital Management, u.s. Multistrategy 5.1 9.0 –7.1

1 0 0 t o P - P e r f o r M i n G l A r G e H e D G e f u n D sFund, Manager(s) management Firm, Location strategy

A s s e t s , i n b i l l i o n s

Y t D t o tA l r e t u r n

2 0 1 1r e t u r n

1Fund was launched in 2011. 2Return is for the nine months ended on Sept. 30. Returns are for the 10 months ended on Oct. 31. Includes funds with more than $1 billion in assets. Sources: Bloomberg, hedge-fund databases, hedge-fund firms, investors

2 6 b lo o m b e r g m a r k e ts Fe b r u a r y 2 0 1 3

government-backed mortgage se-curities dropped in value as Obama expanded programs to help owners refinance and bonds without insur-ance fell amid the euro crisis. Narula took advantage. He later concluded that the Federal Reserve was going to help homeowners and bought bonds ahead of its September announce-ment that it would buy $40 billion a month of agency—that is, Fannie-, Freddie- and Ginnie Mae–backed—mortgage bonds. “To revive the hous-ing market, the Fed has thrown a lot of firepower at agency mortgage-backed securities,” Narula says. “Pol-icy makers have worked hard to let homeowners refinance. They’ve been clear that that’s their mission—and you want to be careful going against that mission.”

In addition to his intuition on Wash-ington policy moves, Narula uses math-ematical models to calculate how long homeowners will make payments at their current interest rates before ei-ther refinancing or defaulting. The models predict behavior based on a homeowner’s credit score, address, loan size, loan age and other factors. The algorithms also allow sophisti-cated investors to hedge against wrong-way bets. “You want to come up with wagers where if you’re right, you’ll do really well and if you are wrong, you don’t get hurt too badly,” Narula says.

No. 1 Metacapital is followed on the

list by Steve Kuhn’s Pine River Fixed Income Fund, which also invests in mortgage bonds and returned 32.9 percent. Pine River captured No. 2 and No. 4 and tied for No. 19. That fund is run by portfolio manager Aaron Yeary. CQS Directional Opportunities, run by

Michael Hintze’s London-based CQS U.K. LLP, was No. 3 and the top Eu-ropean fund. Crispin Odey’s London-based Odey European was second best in Europe, with a 24.1 percent return. (See “Betting on Banks,” page 44.)

Odey is a stock picker, as is Internet

investor Chase Coleman, whose Tiger Global fund was No. 1 in 2011. It fell to No. 12 in 2012, with a 21 percent re-turn. Coleman was the only protege of Julian Robertson, founder of Tiger Management LLC, to crack the top 20. “Tiger cub” Lee Ainslie of Maver-ick Capital Management saw his No. 31 Maverick fund gain 16.0 percent. Ainslie benefited from wagers on Ap-ple Inc., which returned 47.6 percent as of Oct. 31.

David Tepper also made money on

Pine River founder brian taylor started the firm after 14 years at Minnetonka hedge fund EBF.

PolicY makers have maDe it their missioN to helP homeoWNers reFiNaNce, Narula saYs. ‘You WaNt to be careFul goiNg agaiNst that missioN.’

2 8 b lo o m b e r g m a r k e ts Fe b r u a r y 2 0 1 3

fund’s assets because he couldn’t achieve the returns he had histori-cally produced.

Narula attributes his success to long years of studying the bond mar-kets. The son of an Indian diplomat, he earned an engineering degree from the Indian Institute of Technology in Kanpur, one of the country’s top schools. His real interest, however, was finance, and in 1985, he enrolled at Columbia Business School in New York, where he earned a Ph.D. in man-agement science while also studying finance. He then spent 11 years as a mortgage bond analyst and trader at Lehman Brothers Holdings Inc.

Narula started Meta-capital in 2002 with $15 million from friends and his own savings. In that year, he gained 17 per-cent while the S&P 500 fell 23 percent. Inves-

tors came running. Narula saw the danger in the market for subprime mortgages as early as 2005 and started shorting them. His fund suf-fered when valuations kept rising, and investors headed for the door. In 2006, Narula returned $500 million, and in 2007 he closed the fund. “We had the right idea in shorting the sub-prime,” he says, waving his arm in the direction of his 12-member team

stocks. His Palomino fund, at 24 per-cent, ties for No. 6 in 2012; it was No. 1 in 2009.

Those big gains came amid a fourth consecutive year of underperfor-mance by hedge funds. The average return of 1.3 percent compared with a 14 percent gain, including dividends, for the Standard & Poor’s 500 Index through October. Since Jan. 1, 2009, the average hedge fund gained a cu-mulative 13.5 percent compared with 69.8 percent for the S&P 500. “Hedge funds probably oversold themselves for a long time, saying we’re going to get stocklike returns with lower vola-tility,” says Andrew Junkin, senior consultant at Wilshire Associates, which advises pension plans. “Then 2008 comes and blows those two myths out of the water. We compare their returns to 60/40 stocks and bonds, and over the last five years I’m paying a lot of money for something that really has not delivered.”

Poor returns forced an estimated 635 hedge funds to close in the first nine months of 2012, 8.5 percent more than a year earlier, according to Chicago-based Hedge Fund Research Inc. Some big-name managers threw in the towel. Thomas Steyer, founder of $20 billion hedge fund Farallon Capital Management LLC in San

Francisco, retired at the end of 2012 to focus on public service. Boston Red Sox co-owner and hedge-fund man-ager John Henry closed his Florida-based John W. Henry & Co. and returned assets to investors.

Other titans also returned money. In August, Moore Capital Manage-ment LLC founder Louis Moore Ba-con said he would give back $2 billion, or 25 percent, of his flagship hedge

1 Bridgewater Associates (Westport, Connecticut) $81.3

2 Man Group (London) 60.0

3 JPMorgan Asset Management (New York) 44.5

4 Brevan Howard Asset Management (London) 39.3

5 BlueCrest Capital Management (London) 33.9

6 Och-Ziff Capital Management (New York) 31.8

7 BlackRock Advisors (New York) 27.0

D.E. Shaw & Co. (New York) 27.0

9 Baupost Group (Boston) 26.5

10 Winton Capital Management (London) 26.2

Figures are the latest available. Sources: Bloomberg, hedge-fund databases, investors

W o r l D ’ s l A r G e s t H e D G e - f u n D f i r M s

FirmsAssets unDer MAnAGeMent,

in billions

b e s t- P e r f o r M i n G s t r At e G i e s

20%

15%

10%

5%

0%

–5%

–10%

20 %

15 %

10 %

5 %

0 %

−10 %

−5 %2.9%

E Q U I T Y STAT I ST I C A L A R B I T R AG E

9.7%

C A P I TA L ST R U C T U R E /C R E D I T A R B I T R AG E

0.6% 9.4%−4.4%

B LO O M B E R G G LO B A L H E D G E F U N D I N D E X

1.3%

A S S E T B AC K E D

3.3% 14.9%

D I ST R E S S E D S E C U R I T I E S

8.3%

−7.6%

M O R TG AG E - B AC K E D A R B I T R AG E

15.2% 20.2%

20112012

For the Full list, dowNLoad ouR iPaD aPPat mkts <go> oR bit.lY/bbgmkts .

Source: Bloomberg

3 0 b lo o m b e r g m a r k e ts Fe b r u a r y 2 0 1 3

sitting in front of computer terminals in his sparsely furnished Manhattan office. “If you are too early, you are wrong.”

Narula launched his Mortgage Op-portunities Fund in 2008 and has thrived on buying and selling agency-backed mortgages while keeping a close eye on the Fed. “The Fed’s mis-sion is to drive down the 30-year mortgage rate,” Narula says. In the past five years, he has devised a series of trades to take advantage. In the third quarter of 2008, anticipating government intervention in the mortgage market, he bought agency bonds that were backed by 30-year mortgages while simultaneously sell-ing U.S. Treasury securities. After agency mortgage prices had risen, he closed the trade, shorted 30-year mortgage bonds and bought 15-year bonds. At the end of 2011, he switched to buying 30-year mortgage bonds in anticipation of further government buying.

Beyond his Fed watch, Narula has geared up his algorithms to anticipate what homeowners will—and won’t—do. Because housing values have fallen and banks are stingy with new loans, many haven’t been able to re-spond to low interest rates by refi-nancing, even with new government programs. “Betting that homeowners will not be refinancing has been a winning wager,” Narula says.

Pine River’s Steve Kuhn churns through massive amounts of data to determine which bonds to bet on. “Everyone has the same research, but it depends on how you look at it,” Kuhn, 43, says.

Kuhn’s analysis convinced him to

bet on subprime mortgages. “The best trade in 2012 was being long sub-prime,” says Kuhn, who has an eco-n o m i c s d e g r e e f r o m H a r v a r d University. “It’s nice to be right about that one.”

In November 2011, Pine River

bought subprime-mortgage-backed bonds as cheaply as 42 cents on the dollar. A year later, they had risen to 72 cents. Pine River reduced its sub-prime holdings through 2012, as other investors poured into the mar-ket. “We like to say some of the new entrants are going to pay a tuition price,” he says. “They don’t know the market as well as we do.”

A Minneapolis native, Kuhn is well traveled. He started out trading mu-nicipal bonds at Piper Jaffray Cos.

No. 2 fund manager steve kuhn says, ‘The best trade in 2012 was being long subprime.’

iN November 2011, PiNe river bought mortgage securities For as little as 42 ceNts oN the Dollar. a Year later, theY haD riseN to 72 ceNts.

3 2 b lo o m b e r g m a r k e ts Fe b r u a r y 2 0 1 3

before working at commodities gi-ant Cargill Inc., Chicago-based hedge fund Citadel LLC and, starting in 2002, Goldman Sachs Group Inc. In 2005, Goldman sent him to China to educate staffers of sovereign-wealth funds and the central bank on the

U.S. mortgage market. While there, he also taught finance to students at Tsinghua and Peking universi-ties. At Pine River, he has taken ad-vantage of his Chinese connection. The firm opened an office in Beijing in 2010 that employs a squad of 33

quantitative analysts and software developers.

Kuhn was hired at Pine River in 2008, joining fellow Minneso-tan Brian Taylor, who founded the firm in 2002 after spending 14 years at Minnetonka hedge fund EBF &

1 Cheyne Total Return Credit 1 David Peacock, John Weiss Cheyne Capital Management, U.K. Fi xe d i n c o m e $555.0 61.4% –13.2%

2 NTAsian Discovery Kenneth Ng NTAsset, Thailand L o n g - b i a s e d e q u i t y 283.9 48.9 4.6

3 Barnegat Investments Bob Treue Barnegat Fund Management, U.S. Fi xe d - i n c o m e a r b i t r a g e 625.7 41.4 11.1

4 Hildene Opportunities Brett Jefferson Hildene Capital Management, U.S. S t r u c t u re d c re d i t 618.3 39.4 13.3

5 Tilden Park Capital Master Josh Birnbaum Tilden Park Capital Management, U.S. S t r u c t u re d p ro d u c t 851.0 33.9 10.1

6 BlackRock Obsidian Stuart Spodek BlackRock Alternative Investors, U.S. Fi xe d i n c o m e 792.0 31.4 –13.5

7 Midgard Fixed Income Christian Lindstrom Lage PFA Asset Management, Denmark Fi xe d - i n c o m e a r b i t r a g e 503.7 31.3 22.5

8 400 Capital Credit Opportunities Chris Hentemann 400 Capital Management, U.S. A ss e t b a c ke d 318.0 28.9 3.1

9 Asgard Fixed Income I Morten Mathiesen Moma Advisors, Denmark Fi xe d - i n c o m e a r b i t r a g e 289.0 28.7 25.3

10 Jana Nirvana Barry Rosenstein, David DiDomenico Jana Partners, U.S. Eve n t d r i ve n 600.0 28.6 –3.5

11 Danske Invest Fixed Income Strategies Michael Petry Danske Bank, Denmark Fi xe d i n c o m e 962.2 28.5 18.3

12 Quantedge Global Leow Kah Shin, Chua Choong Tze Quantedge Capital, Singapore M a c ro 409.1 27.7 32.9

13 Midway Market Neutral Robert Sherak Midway Group, U.S. Mortgage-backed arbitrage 379.0 25.8 22.3

14 Ellington Credit Opportunities Michael Vranos Ellington Management Group, U.S. M o r tg a g e b a c ke d 432.5 24.4 1.7

15 Chenavari Toro Capital IA Benoit Pellegrini, Dan Turner, Frederic Couderc Chenavari Investment Managers, U.K. A ss e t b a c ke d 334.7 24.3 24.7

CTC Team managed CTC Fund Management, U.S. M u l t i s t r a te g y 353.5 24.3 35.9

17 Marcato International Richard McGuire Marcato Capital Management, U.S. L o n g /s h o r t 500.0 24.1 – 4.3

18 STS Partners Michael Scheckman Deer Park Road Corp., U.S. A ss e t b a c ke d 563.2 23.5 24.0

19 CCA Mortgage/Credit Opportunity Rajesh Agarwal Citi Capital Advisors, U.S. Mortgage-backed arbitrage 460.3 23.0 – 4.2

OEI MAC Crispin Odey Odey Asset Management, U.K. L o n g /s h o r t 733.9 23.0 –20.1

21 Cassiopeia Michel Dominice, Alain Dos Santos Dominice & Co. Asset Mgmt., Switzerland M a r ke t n e u t r a l 602.4 22.7 6.2

22 Axonic Credit Opportunities Clayton DeGiacinto Axonic Capital, U.S. Mortgage-backed arbitrage 962.0 21.7 6.0

SAB Capital Partners Scott Bommer SAB Capital Management, U.S. L o n g /s h o r t 450.0 21.7 –0.4

24 Cerberus International II Steve Feinberg Cerberus Capital Management, U.S. D i s t re ss e d 378.0 21.4 9.9

ECF Value Jeff Gates, Dax Vlassis Gates Capital Management, U.S. D i s t re ss e d 384.4 21.4 2.9

Perceptive Life Sciences Master Joseph Edelman Perceptive Advisors, U.S. L o n g /s h o r t 536.0 21.4 5.9

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Returns are for the 10 months ended on Oct. 31. Includes funds with $250 million to $1 billion in assets. Sources: Bloomberg, hedge-fund databases, hedge-fund firms, investors

3 4 b lo o m b e r g m a r k e ts Fe b r u a r y 2 0 1 3

Associates. Pine River, which also has offices in New York, is named after a town in Minnesota close to where Taylor has a lake house.

Kuhn plays in markets where Na-rula has a smaller footprint. He buys and sells nonag enc y mortgag e bonds—that is, those not bought or backed by Fannie and Freddie. He uses several stratagems to hedge against a decline in their value. To de-termine which securities to buy, Kuhn and his team analyze massive amounts of data on servicers and bor-rowers, from credit scores and loan age to ZIP codes and income.

Kuhn is now cutting his holdings in the subprime mortgage market. Na-rula, by contrast, thinks he can glean hefty returns from agency bonds for several more years. Others think the game is just about up. “Our expec-tations are much more muted,” says John Bailey, chief executive offi-cer at Spruce Private Investors LLC in Stamford, Connecticut, which advises clients on alternative invest-ments. “The easy money’s been made.”

kambiz Foroohar covers Billionaires at BloomBerg news in new York. kforoohar@BloomBerg.net kellY bit covers hedge funds in new York. kBit@BloomBerg.net with assistance from JoDY sheNN in new York.

To write a letter to the editor, send an e-mail to bloombergmag@bloomberg.net or type mag <go>.

1 SAC Capital International Steve Cohen sAC Capital Advisors, u.s. $789.5

2 Viking Global Equities Andreas Halvorsen Viking Global investors, u.s. 456.5

3 OZ Master Daniel Och och-Ziff Capital Management Group 402.6

4 Elliott International Paul Singer elliott Management, u.s. 284.1

5 Oculus David E. Shaw D.e. shaw & Co., u.s. 278.6

6 Citadel Kensington/Wellington Team managed Citadel Advisors, u.s. 262.5

7 Tiger Global Feroz Dewan, Chase Coleman tiger Global Management, u.s. 254.5

8 Silver Point Capital Edward Mule silver Point Capital, u.s. 219.7

9 Pine River Fixed Income Steve Kuhn Pine river Capital Management, u.s. 210.0

10 Greenlight Capital David Einhorn Greenlight Capital, u.s. 196.7

11 King Street Francis Biondi, Brian Higgins King street Capital, u.s. 193.5

12 Elliott Associates Paul Singer elliott Management, u.s. 178.8

13 Cerberus Institutional Partners Series IV Steve Feinberg Cerberus Capital Management, u.s. 177.4

14 Canyon Value Realization Joshua Friedman, Mitchell Julis Canyon Capital Advisors, u.s. 170.4

15 Palomino David Tepper Appaloosa Management, u.s. 169.1

16 BTG Pactual GEMM Team managed btG Pactual Global Asset Management, u.s. 165.0

17 Drawbridge Special Opportunities P. L. Briger Jr., C. Dakolias fortress investment Group, u.s. 158.9

18 BlueCrest International Class A Onshore Michael Platt blueCrest Capital Management,u.K. 157.3

19 Discovery Global Opportunity Robert Citrone Discovery Capital Management, u.s. 146.1

20 BlueMountain Credit Alternatives Andrew Feldstein blueMountain Capital Management, u.s. 134.7

Our rankings Of hedge-fund managers are based on data compiled by Bloomberg specialist Anibal Arrascue and information supplied by hedge-fund research firms, hedge funds and investors. This year, we have two lists of top performers: 100 funds with assets greater than $1 bil-lion and 25 funds with assets of $250 million to $1 billion. Assets and returns were for the 10 months ended on Oct. 31, 2012.

The returns we obtained were net of fees. We calculated profits for each fund by dividing the net figure by 100 percent minus the sum of the man-agement and incentive fees. If a fund

didn’t report its fees, we used the average of funds in our universe: a 2 percent management fee and a 20 percent incentive fee.

Using gross returns, we were able to reconstruct approximately what the assets were at the start of the year. (Because we didn’t have inflows or outflows, the asset numbers didn’t take asset flows into account.) We subtracted original assets from cur-rent assets and multiplied the result by each fund’s performance fee to derive the profits. Management fees aren’t included; we assumed they were used for the day-to-day operations.

Our ranking of the most-profitable funds took 2011 performance num-bers into account because most man-agers get paid only when the value of their funds is greater than its previ-ous highest value. About half of the top-performing large hedge funds had negative returns in 2011. The profits for these funds were calcu-lated by using the percentage by which their return this year exceeded their “high-water mark.”

Several funds appearing on the most-profitable ranking do not show up on our lists of top performers. That is because the size of a fund can trump returns in calculating profits.

We couldn’t obtain returns from several of the biggest hedge-fund firms by assets. For a handful of other firms, we had returns on only one or two funds. Onshore and offshore as-sets and returns were combined for a number of funds, while figures for other funds on our lists were for only the larger class of the fund.

The numbers were difficult to ver-ify. Unless the information came from Bloomberg or the hedge-fund firm it-self, we tried to verify it with other sources.

BlOOmBerg rankingsrankings@BlOOmBerg.net

How we CrunCHed tHe numbers

Fund, Manager(s) management Firm, LocationP r o f i t, i n M i l l i o n s

Profits are for the 10 months ended on Oct. 31. Sources: Bloomberg, hedge-fund firms and databases, investors

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The fund manager, who’s largely an eq-uities investor, has produced an average annual return of 30 percent since start-ing his firm two decades ago. He’s had just one money-losing year, 2008, when his main fund tumbled 19 percent. For calendar 2011, he and his managers shared $907 million. SAC Capital Inter-national has been closed to new investors since August 2011.

In November, Cohen was for the first time directly linked to a case of insider trading after Mathew Martoma, a former SAC portfolio manager, was arrested. Martoma, who worked at an SAC unit

called CR Intrinsic Investors LLP from 2006 to 2010, was charged in what U.S. prosecutors call a record-setting insider-trading scheme that netted as much as $276 million in profits and averted losses for SAC Capital Advisors LP. The follow-ing week, SAC told investors on a confer-ence call that it had been served with a Wells notice, a warning that the U.S. Securities and Exchange Commission is considering filing a civil claim.

Neither Cohen nor SAC had been accused of wrongdoing as of mid- December. Jonathan Gasthalter, a spokesman for SAC, issued a state-ment saying: “Mr. Cohen and SAC are confident they have acted appropri-ately and will continue to cooperate with the government’s inquiry.”

SAC President Tom Conheeney told investors on the conference call that Cohen was deposed in the civil case that the SEC brought against Martoma. The case involves tests of a drug designed to treat Alzheimer’s disease that was being developed four years ago by Dublin-based Elan Corp. and Madison, New Jersey–based Wyeth, now a unit of Pfizer Inc. Prosecutors say that Martoma solic-ited information from a doctor helping conduct clinical tests on the drug. When

he learned that the tests were going badly, Martoma had a 20-minute phone call with Cohen, prosecutors say, after which SAC sold its positions in Elan and Wyeth and then bet against the companies.

SAC was first linked to the govern-ment’s insider-trading investigation in 2009, when former SAC Capital em-ployee Richard Choo-Beng Lee was charged with insider trading at another firm. Six former or current SAC em-ployees have been tied to insider trad-ing while working at SAC; three have pleaded guilty. kellY Bit

While Steve Cohen has been in the news lately because of former and current em-ployees’ alleged involvement in insider trading, the hedge-fund manager has continued to do what he does best: make money. SAC Capital International, Cohen’s flagship fund, was the world’s most-profitable hedge fund in the first 10 months of 2012, earning $789.5 million, according to BloomBerg markets’ an-nual ranking.

SAC is No. 1 not so much because of performance—it ties for No. 86 on that measure, with a 10 percent return—but because Cohen charges some of the highest fees on Wall Street. While most funds impose a 1 to 2 percent management fee and then take 15 to 20 percent of the profits, Cohen levies 3 percent and as much as 50 percent, according to investors.

sac capital international topped the most- profitable ranking, at $789.5 million, even though the fund returned just 10 percent. cohen charges incentive fees of as much as 50 percent.

3 6 b lo o m b e r g m a r k e ts Fe b r u a r y 2 0 1 3