By Michael Tsang
Jan. 12 (Bloomberg) -- Jean-Marie Eveillard, who beat 99 percent of rival equity fund managers last year by hoarding cash instead of borrowing it, is loading up on Japanese insurers and Hong Kong developers.
“Leverage eliminates your staying power,” said Eveillard, whose $16.8 billion First Eagle Global Fund beat the Standard & Poor’s 500 Index every year this decade. “If things go well, you look even better, but if things go badly, you end up doing worse,” he said in an interview from his office at Arnhold & S. Bleichroeder Advisers LLC overlooking Central Park in New York. “You could blow up if big leverage is being used.”
By shunning leverage, Eveillard, Israel Englander and Steven Lehman are winning in the worst stock market since the Great Depression. While hundreds of hedge funds collapsed last year and financial institutions reported more than $1 trillion of losses and writedowns since the start of 2007, investors who avoided borrowing now have the money to buy stocks in the MSCI World Index trading at the lowest valuations since at least 1995, according to data compiled by Bloomberg.
Eveillard, 68, says Japanese property and casualty insurers Aioi Insurance Co. and Nissay Dowa General Insurance Co. are too cheap to pass up. Englander, whose $13.5 billion Millennium Partners LP hedge fund limited losses to about 3.5 percent last year, plans to continue trading hundreds of millions of shares a day in search of gains of less than half a percentage point.
Gold Bets
At Federated Investors Inc., Lehman’s $1.3 billion Federated Market Opportunity Fund, which beat the S&P 500 by more than 30 percentage points last year with just 1 percent of its assets in U.S. stocks, is betting on gold to lead a first- half rebound.
“Going into the year, I thought and I continue to think one needs to be extraordinarily nimble and unconventional,” Lehman, 51, said in a telephone interview from Pittsburgh.
Avoiding leverage risks forgoing bigger gains if the market turns around. Easy credit made borrowed money fuel for the five- year bull market that ended in October 2007, after the S&P 500 doubled. Futures on the S&P 500 today slipped 0.2 percent as of 11:54 a.m. in London.
“Are funds going to be criticized for being too cautious?” said Nicola Ralston, co-founder of London-based PiRho Investment Consulting Ltd., which advises clients on investing in hedge funds and recommends strategies that don’t rely on leverage. “Plenty of people are talking about opportunities that you only see once in a lifetime and then people will ask, ‘Why were you leveraged at the top of the market and why aren’t you now?’”
Toxic Shock
Leverage was toxic last year as credit markets froze and stocks, bonds and commodities plunged. The S&P 500 lost the most since 1937. The Reuters/Jefferies CRB Index of 19 commodities slid 36 percent, the biggest drop since at least 1957. The difference between yields on Treasuries and both investment- grade debt and junk bonds soared to records as debt prices dropped.
Plummeting assets forced funds to sell, driving down prices further as lenders hoarded cash and demanded collateral. The average equity hedge fund declined 26 percent, the most since Hedge Fund Research Inc. began tracking the data in 1990. More than 900 hedge funds may have shut, topping the all-time high of 848 closures in 2005, according to the Chicago-based firm.
Leverage, which London-based hedge fund operator Man Group Plc estimates enabled some investors to borrow more than $7 for every dollar in capital last year, may have dwindled to almost zero, said Karim Leguel, chief investment officer in New York for London-based Rasini & C.
Margin Balances
The amount of margin debt at New York Stock Exchange member brokerages fell by almost half from the record $381 billion in July 2007, according to exchange figures.
“Funds right now that have leverage, their only aim is to get away from it,” said Leguel, who advises clients on investing in hedge funds.
That works to the advantage of Eveillard, who has never been a believer in using debt. Eveillard, who had only three down years since 1979, including last year’s 21 percent loss, seeks shares trading at discounts to measures such as assets and cash flow and follows the principles of value investing espoused by billionaire Warren Buffett, chief executive officer of Berkshire Hathaway Inc.
This year, Eveillard aims to increase wagers in Asia. His Global Fund became the largest overseas investor in Aioi, Japan’s fifth-biggest non-life insurer by market value, in November after boosting its stake to 11.1 percent of Aioi’s total outstanding shares, according to a filing with Japan’s Ministry of Finance.
Double Discount
The firm is also the biggest foreign shareholder in Nissay Dowa, the sixth-largest property and casualty insurer, data compiled by the finance ministry and Bloomberg show. Eveillard began buying Nissay Dowa in early 2008, Bloomberg data show.
“The stocks are selling exorbitantly cheaply,” Eveillard says. “Then you get that portfolio of Japanese equities at an even biggest discount to the current market value.” Japanese stocks traded at 83 percent of their so-called book value, or assets minus liabilities, at the end of October, according to data compiled by Bloomberg.
Eveillard is also buying Wharf (Holdings) Ltd. because the owner of office buildings and shopping malls traded at 0.32 times book value in October, the lowest since at least 2001, according to data compiled by Bloomberg. The Hong Kong-based landlord and port operator is a top pick of both New York-based Goldman Sachs Group Inc. and Credit Suisse Group AG, based in Zurich.
House Bear
Federated’s Lehman, known as the house bear by colleagues, is betting stocks will rally over the next six months before retreating. Three of his top four holdings are gold stocks, which he said will appreciate as U.S. borrowing to finance government efforts to revive the economy erodes the dollar.
The dollar fell 6.3 percent against a basket of six world currencies since Nov. 21, while gold climbed 26 percent from a 13-month low on Oct. 24, according to data compiled by Bloomberg.
“Gold is in a bull market,” said Lehman. “Given the unprecedented stimulus measures that have been taken and will continue to be taken, ultimately that will be negative for the currency. Gold is priced in dollars, so consequently gold will be more expensive.”
His biggest holding is Yamana Gold Inc., the Toronto-based owner of the Chapada gold and copper mine in Brazil. The stock climbed 45 percent since the fund increased its stake by 68 percent to 11.5 million shares at the end of October.
99 Percent
Lehman’s Market Opportunity Fund, which can invest in stocks and bonds and profit from declining as well as rising securities, fell 6.7 percent last year. The performance exceeded 99 percent of its competitors, according to data compiled by Bloomberg.
Englander, 60, founded the New York-based Millennium Partners hedge fund in 1989. The former American Stock Exchange floor broker started the firm with about $5 million of his money and $30 million from outside investors. Now Millennium employs more than 125 money managers, according to its Web site.
In 2008, most of its decline was money on account at Lehman Brothers Holdings Inc. that was lost when the securities firm declared bankruptcy in September, said a person familiar with the fund. Before last year, Millennium had never suffered a losing year, the person said.
‘High IQ’
Millennium relies on strategies that limit both leverage and making bets on the direction of securities. Its computers comb investment data worldwide looking for instances where assets that normally rise and fall together have deviated from that pattern so it can bet they eventually revert to form, said the person, who declined to be identified because the strategies are private.
Known as statistical arbitrage, this method aims to capture tiny profits from thousands of trades each day. The fund’s managers also employ so-called long/short equity strategies in which similar stocks are played against each other. Both techniques are considered “market neutral” because they don’t require guessing whether prices will go up or down, just that they will return to historic alignment.
To protect clients’ capital, Millennium designs trades to generate returns of no more than 0.3 percent a day, the person said. Money managers operate independently but share risk restrictions. On a recent day, it traded about 350 million shares in markets around the world, the person said.
“To be a reasonable investor over the long term, it doesn’t take a high IQ,” said Eveillard. Instead, it’s a “willingness to move away from the herd to follow your own path, at the risk of lagging, if you think the herd is about to run over the cliff,” he said.
To contact the reporter on this story: Michael Tsang in New York at mtsang1@bloomberg.net.
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