High Performance

John Paulson

Paulson Enhanced Partners
Paulson had a chance to learn from the best, working alongside legendary investors like Odyssey Partners' Leon Levy and Bear Stearns' Ace Greenberg early in his career. Something rubbed off. His Paulson Enhanced Partners fund, a leveraged merger-arbitrage vehicle with $2.78 billion in assets, has ridden the surge in merger and acquisition activity to big profits.
Merger-arbitrage firms essentially go long or short the shares of buyers or sellers in a merger deal, depending on whether they believe a deal is going to close at the promised time and price; be renegotiated up or down; attract more bidders; or possibly fall apart. Paulson's fund, ninth in our ranking, is pretty good at it, having posted a cumulative average gain of nearly 38% a year over three years; it was up more than 55% in 2007, through June.

Diversification didn't help much in the credit crunch. Tech funds were among the few winners. Members of the Hedge Fund 50 took some hits during the month, though there were exceptions.

"We've just come off a period of record activity where spreads were tight," says Paulson, who confined his remarks to strategy. "But there was also unprecedented competitive bidding, not just in U.S. deals but in Canada and Western Europe, where multiple bids were made on utilities and mining assets, and where the final bids were much higher than the initial offerings," says the 51-year old New Yorker, who's built a firm with $24 billion in total assets.
Many of Paulson's successful bets are based outside the U.S. At mid-year the portfolio included bets on Scania (ticker: SCVB.Sweden), Akzo Nobel (AKZA.Netherlands), Alcan (ALC.France),and Portugal Telecom (PTC.Portugal). The fund is also said to have made a killing by shorting the ABX Index, a benchmark that reflects the performance of subprime mortgages.
As successful as the Enhanced Partners Fund is, it may have to cede some of the spotlight to the Paulson Credit Opportunities fund Paulson set up last year as a bet that tight credit spreads would widen back to traditional levels. The fund was up 27% in August, and 410% for the year.
-- J.W.

Philip Richards

RAB Special Situations Fund
This fund owes its stellar 47.69% cumulative average return in the past three years, and its No. 1 ranking overall on Barron's list, to a long-term commitment to commodity plays worldwide, as well as deep-value stock picking. One of the four-year-old fund's major themes is to anticipate China's needs as it grows into a major global economic force. "We're trying to buy the stuff the Chinese are going to buy for the next two decades," says Philip Richards, the Oxford-educated head of the London-based fund's parent, RAB Capital, which oversees $6.7 billion.

Zbigniew Hermaszewski

To date RAB's shopping list has included uranium and copper mines, and steel and energy producers. One particularly impressive play: Falkland Oil & Gas (FOGL.UK), which explores for oil off Argentina, where seismic surveys have indicated big potential. The stock is up 64% so far this year.
In many cases, RAB Special Situations, with a team of 22 professionals and $2.3 billion in assets, eschews the public markets. It has provided financing for a small Western commodity producer with a foreign subsidiary, in exchange for an equity stake in both pre- and post-IPO stages. The idea is to buy, say, copper in the ground for a penny a pound, which can later be sold for $3.50 a pound. "We're trying to buy world-class assets cheap," says Richards, 47.
RAB Special Situations doesn't limit itself to commodities: It now has a 6% position in troubled U.K. lender Northern Rock (NRK.UK), which it reportedly picked up at bargain-basement prices.
The fund will take short positions occasionally, but prefers going long. Richards' view of shorting: "You can make a living but never make a fortune." He definitely shoots for the latter.
-- J.W.

Zbigniew Hermaszewski

Altis Global Futures Portfolio
Altis Partners' founder and director claims indifference to the recent turmoil in world markets. "In essence, we're not dependent on the direction of the markets," Hermaszewski says. "If markets move consistently -- either bull or bear -- then that should give us opportunity to profit."

George Papamarkakis

There's good reason for his dispassionate approach: Altis' computer-driven trading has racked up top-notch returns since its founding just over six years ago, and money is rolling in. The firm, with offices on the island of Jersey and in London, has seen assets under management grow from $12 million to more than $600 million in just six years. The primary draw is the flagship Global Futures Portfolio, which trades in 60 markets around the world and ranks 45th on our list, with a cumulative average three-year gain of 23.32%.
The computer trades based on the opportunities the firm has programmed in. "So if there's some sort of movement or economic imbalance, expansion, contraction, we should be able to participate in it," says the one-time Ph.D. candidate at Imperial College in London.
Altis' strategy is a mix of long-term trend-following and shorter-term tactical trading. The goal, according to Hermaszewski, is to provide a measure of risk management for most investors, including those who want some overall portfolio protection from bear equity markets. "Our approach as a fund manager is to hold very diverse portfolios, and I would suggest that investors in general do that." Sound advice.
-- Randall S. Devere

Jean-Francois Tardif

Sprott Opportunities Fund
The long/short equity fund's senior portfolio manager combines firsthand research skills with a love of numbers and an ability to discern how global trends will affect Canadian balance sheets. He's also pretty confident: "I don't wait for people to tell me what to think." Although Tardif's fund is empowered to invest anywhere, it tends to focus on small, fast-growing Canadian companies.
That's been a winning formula of late. The young fund, which barely exceeds our three-year track record requirement, has posted average annual cumulative returns of more than 33% over that time, good enough for the 18th spot. The fund is part of Toronto's Sprott Asset Management, which runs about $5 billion in total.

Table: Hedge Fund 50

The 38-year old native of rural Quebec is proud that he's achieved these returns without taking huge risks. He concentrates on value metrics like free-cash flow, sales, and earnings per share but also bores in on expanding margins and multiples. One example: Rally Energy (RAL.Toronto), a Calgary oil-and-gas-exploration concern purchased for C$2.42 in May 2005, only to have the stock taken out at C$7.30 August of this year in a takeover.
On the short side Tardif looks for shrinking margins and high capital cost, and even higher valuations. Cascade (CRW.Toronto), a Quebec paper company, was shorted in the mid-teens, and covered below $10 in August. Tardif thought the Canadian dollar's huge rise against the U.S. currency would squeeze margins of a local manufacturer serving U.S. and foreign markets.
Tardif increased his short and sold some long positions this summer, helping keep his August loss to 2.9%. More recently he's sold some of his winners, so he has cash available to play opportunities provided by the recent liquidity crunch.
-- J.W.

George Papamarkakis

MaxQ Fund
This is a throwback hedge fund. It is small, nimble and very active in some unusual markets -- a profile that Papamarkakis intends to keep.
"Our size allows us to trade quickly and aggressively around our positions, and that's been probably the most important thing, particularly in times of duress," says the Morgan Stanley alum who founded London-based North Asset Management, the fund's parent, in 2002. The fund did well in August and other fraught markets, "simply because we were able to turn our portfolio around very quickly," he says.
The $278 million global macro MaxQ fund, No. 32 on our list with a cumulative average annual return of 26.32%, relies heavily on short-term tactical trading. While the firm holds some fundamental views, it will trade against them if the market has a different perspective or if momentum reigns. "We're very respectful of price action," says Papamarkakis, who attended the University of Athens and was a developer of Morgan's proprietary-trading group. About 80% of his firm's assets are split between fixed income and currencies; the rest is in stocks.
Distinguishing itself from global funds devoted to the biggest economies, MaxQ focuses on non-euro-currency markets such as Norway, Sweden, Poland, the Czech Republic, Hungary, Switzerland, Turkey and South Africa. These markets, Papamarkakis notes, are liquid and mature enough to permit multi-faceted plays like volatility trades. Yet their economic policies aren't always as "forward-looking," nor their portfolio flows as "sophisticated," as G-10 countries, he says. "To us, there are more obvious opportunities in the smaller markets versus the larger ones."
Smaller also works for MaxQ and North as well. "As the industry will tend to be dominated by bigger and bigger funds," Papamarkakis says, "the potential to trade tactically will continue to be there for us."

Barrons 01.10.2007