For most hedge fund managers, the bull market of the past six years has been a downer. Investors increasingly complained they could make more with an index fund than they could betting on the Masters of the Universe.
This year, for the first time since the 2008 financial crisis, hedge funds are winning. Even though ETF assets in the U.S. have surpassed those of hedge funds, there are managers including John Burbank, David Tepper and John Paulson, returning at least triple the return of U.S. stocks and beating bonds by more than 10 times.
"It's a great year across the board," says Stewart Massey, chief investment officer at Massey Quick which invests in hedge funds. "We've seen managers in both equity and credit do much better on the short side and they are doing well on the long side too," he says.
Hedge funds could hardly ask for better conditions. Global mergers are at levels unseen since 2007. Central banks are no longer moving in lock-step.
In the U.S., the end of quantitative easing has led to more dispersion in stocks, while in Europe and Japan, stimulus has sent shares soaring.
Even the average hedge fund is beating benchmarks, returning 3.4% through May, more than double the gain for all of 2014.
This year's advance is a smidgen more than what investors would have made if they'd invested in an S&P 500 ETF, and 2.6 percentage points more than returns from Vanguard's Total Bond Market ETF.
Burbank, who runs the $3.9 billion Passport Capital, has posted one of the best performances this year with a 24.2% return in his Special Opportunities Fund, says people are familiar with his performance. He profited from a large bet on stocks in Saudi Arabia, where the index climbed 18.2% in the first five months of the year. He also speculated on and against consumer stocks, basic material companies and technology shares.
Tepper, who manages $20 billion at Appaloosa Management, posted a 14% return in his main fund, according to a person with knowledge of the firm. He said in May that investors shouldn't fight central banks and that U.S. equities were cheap. He also forecast a climb in Chinese equities.
Eric Mindich's $9 billion Eton Park Capital Management made some of its 10% return on companies undergoing corporate events, such as mergers. The firm has profited in the U.S., Europe and Japan, according to a person familiar with the firm.
Macro funds have had mixed results this year, with some getting smacked when the Swiss National Bank unexpectedly abandoned its cap with the euro in January.
For those that navigated central bank policies, it's been a fruitful period.
Round Table Investment Management, run by former Bank of America. chief investment officer Ian Banwell, made 10.3% on Chinese and Japanese equities, according to an investor. The firm also predicted the dollar's rally against the yen.
Paulson has been one of the biggest beneficiaries of improved conditions this year. In 2014, the billionaire suffered the second-worst trading year of his career on a wrong-way energy bet, failed mergers and investments in Fannie Mae and Freddie Mac. This year, leveraged versions of Paulson's event- driven and merger funds returned 11.6% and 19.4% respectively.
Spokesmen for all the firms declined to comment on performance.
Investors aren't popping champagne corks yet and managers can't collect profits on the year until January.
"We could very quickly go back to a market that's not driven by fundamentals," says Brad Balter, head of Boston-based Balter Capital Management. "This is the first time since the financial crisis that active managers have done well but it's a little too early to run up the victory flag."
Even so, some investors have been anticipating a hedge-fund comeback. For Massey, the signal came in September when the California Public Employees' Retirement System, the nation's largest public pension fund, said it was exiting hedge fund investments.
"I knew they were getting out at exactly the wrong time," Massey says.
The market is robust enough that two former Goldman Sachs. bankers are starting a hedge fund to profit from a void in bank lending.
Jonathan Egol and Robert Allard, who both worked with structured products at Goldman Sachs, will start Firebreak Capital this year to provide loans that banks are largely unable to make because of rules put in place since the 2008 financial crisis.
"We're really trying to do a lot of the business that banks can't do anymore," says Allard, the firm's chief executive officer. Egol, 45, will be Firebreak's chief investment officer.
Egol best known for running the trading desk that created a synthetic collateralized debt obligation dubbed Abacus 2007-AC1, a failed $1 billion investment tied to the housing collapse that spurred an SEC lawsuit against Goldman Sachs and Fabrice Tourre, a former vice president of the bank.
Allard said Firebreak, which is targeting $150 million for its debut fund, will be able to profit from deals that are too small. The firm says it is working on two such trades.