By Rob Copeland And David Benoit 

Hedge-fund managers are in a buying mood.

Despite getting battered in recent days along with the rest of the investing world, many of these highly paid traders say they are convinced this latest turn will be much like many others since the crisis: a harrowing fall, and a rapid comeback.

"You've got to be not emotional about it," said Rob Hays, chief investment officer of Dallas hedge fund Ashford Investment Management. He noted that trouble abroad often actually buoys U.S. assets such as real estate. "Everything on the ground shows this is not a turn."

The shudder in global stock markets led to the worst two days of performance in years for many hedge-fund managers, Morgan Stanley's prime brokerage told clients in a private note. Stock-focused hedge funds had median losses of 1% on both Thursday and Friday. That was the first time they had two days of losses of that magnitude since August 2011.

Event-driven hedge-fund managers, who bet on the outcomes of mergers, acquisitions and other corporate matters, were pushed into the red for the year, Morgan Stanley said. The median hedge fund is down 1.7% this month, keeping gains below 2% on the year.

And yet many managers said they weren't going anywhere. Managers bought up beaten-down technology and health-care stocks on Friday, the most recent day for which data was available, adding up to nearly year-high trading volume, Morgan Stanley said.

Even investors in some deals in which stocks were particularly hard hit, like the $35 billion marriage of oil-field-services providers Halliburton Co. and Baker Hughes Inc., said they were staying steady. The gap between the price offered and trading price has widened to 23.7% from 13.2% this month, suggesting eroding confidence in the deal.

"We love it," Jeffrey Ubben, founder of ValueAct Capital, which owns big positions in both stocks, wrote in an email. He said he was still betting that management would be "tough enough" to stick the deal through even "at the bottom of a cycle."

The use of leverage, or borrowed money, remains at historically high levels, suggesting managers are keeping the pedal down to profit off any widespread rebound. Stock hedge funds are borrowing more than 50 cents for every dollar of client money, above the norm of recent years, according to Morgan Stanley.

For many investors, trouble for hedge funds during market drawdowns can be particularly hard to swallow because the industry has been energetic in pitching itself as protected from market trends.

But over the past decade, as a wave of new cash has flowed into the sector, hedge funds have become an increasingly large proportion of stock trading on Wall Street. By some metrics, they now represent a majority of active trading, and are often blamed for any outsize moves.

Even as their numbers have proliferated, however, many have stuck to clustering around the same stock picks. As a result, following a pattern from previous market hiccups since the crisis, some of the industry's favorite stocks have been particularly hard hit. Netflix Inc. is down 20% over the past three trading days.

Few hedge-fund managers have reported, even confidentially to investors, their performance for the month. Many of the largest managers have agreements with investors to keep their swings quiet until the end of the month.

Man Group PLC, the world's largest publicly listed hedge-fund firm, had its Global Equity fund fall 6.3% this month through Friday. Industry stalwart Winton Capital's $12 billion Futures fund also got pinched, down 1.6% through Friday, due to a bet on higher stock prices, said a person familiar with the matter.

Balyasny Asset Management, which manages about $9 billion, fell about 0.50% over the same period, with gains from a small energy arm stemming shallow losses elsewhere.

Some funds seem to have turned more bearish in recent weeks. Blaze Tankersley, chief market strategist at BayCrest Partners, an investment bank that trades with many of the largest hedge funds, said his clients have been "actively hedging for the last couple of weeks."

The $5 billion Aspect Capital Ltd., which uses complicated computer models to predict prices, shot up 4% last week alone, adding to gains from a month earlier, driven by bets against oil, investor documents reviewed by The Wall Street Journal show. Oil plunged to fresh six-year lows Monday.

Laurence Fletcher and Gregory Zuckerman contributed to this article.

 

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(END) Dow Jones Newswires

August 24, 2015 19:42 ET (23:42 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.
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