Hedge funds have struggled through another bracing year. The average manager has made just 4.9 per cent in the past 11 months, according to Hedge Fund Research – hardly the kind of eye-watering returns the industry is known for, or charges for.

Amid the disappointment, though, some trades have paid off. A handful of funds have made billions through large, often directional, contrarian bets.

Greek bonds

In March, buying Greek debt did not seem like such a clever move. Several hedge funds had just had their fingers burnt by Greece’s long-expected debt restructuring. Leading market commentators – such as Pimco’s Mohamed El-Erian in the FT – said it was “highly likely” the bailout would be found wanting, and a further restructuring was all but inevitable.

For some, though, the deal set in place huge opportunities. And in late June, when the EU summit saw leaders agree a set of measures to deal with Europe’s spiralling debt crisis, hedge funds began to snap up the still-discounted “strip” of bonds issued by Greece in the March restructuring, convinced that the European Central Bank’s firepower would trigger a major rally. What’s more, they reasoned, with the new bonds issued under UK law, even if Greece did fall into a second debt swap, their legal position would be cast-iron.

Hedge funds initiated positions in the strip at between 14 and 20 cents on the euro.

The single largest buyer of Greek bonds was hedge fund Third Point, say investors. The fund accumulated an approximately $500m position for an average of 17 cents. Based on the recent buyback price of 33 cents, the fund has doubled its money on its Greek trade alone. Third Point’s main fund was up 20 per cent at mid-December.

US mortgages

The best performing managers of 2012 share something in common: almost all of them have bet big, and profitably, on US mortgages. Perhaps more surprisingly, it is a trade that has also paid out in the preceding three years: buying up the dwindling collection of mortgage-backed securities that led the financial system into the financial crisis in the first place.

Fears that European banks would be forced to dump their dollar denominated assets, including holdings of old subprime backed mortgages from the boom, had depressed prices at the end of last year. As those sales failed to materialise, the US government was able to clear its cupboards of MBS left over from the rescue of AIG, and the housing market fundamentals started to take over.

Mortgage-backed bond prices have soared this year, as growing numbers of yield-hungry investors pile in. BTG Pactual’s distressed mortgage fund is up 40 per cent so far this year. Tilden Park, a hedge fund set up by former Goldman mortgage-bond traders, is up 35.5 per cent. And Pine River, the $11bn credit hedge fund manager run by Brian Taylor, has seen its mortgage-focused fund make 26 per cent.

Credit and the ‘London Whale’

Corporate credit markets have been beset by significant pricing anomalies throughout the year. Most notably, in the first quarter, JPMorgan’s chief investment office accumulated a huge position in one key credit index, the CDX 9, warping its price out of kilter with that of its constituents. Hedge funds spotted the arbitrage and played it, betting against a JPM trader known as the “London Whale” and earning hundreds of millions. Bluemountain and Saba Capital both reaped big profits from the trade. The former has seen its $5bn flagship fund return 13.2 per cent this year.

Other non-whale related trades in complex credit and credit derivatives have also paid off. The $650m Cheyne Total Return credit fund is up 67.9 per cent so far this year by trading the spreads between corporate credit derivative tranches and bond yields, for example.

CQS, another prominent credit and bond focused fund, has meanwhile seen its Directional Opportunities fund rise 32 per cent.

Eurozone banks

Financials-focused analysts and portfolio managers at hedge funds have suffered a tough few years, but 2012 has not been one. Bank equities have been among the best performing worldwide – enjoying an LTRO-led rally in the first quarter, and a further major melt-up in the second half of the year.

In the eurozone, banks, propelled by a wave of cheap credit, have seen a massive repricing that several hedge funds have profited from. Toscafund’s flagship financials-focused hedge fund – set up by the firm’s founder Martin Hughes and now run by Johnny de la Hay – has made 25 per cent so far this year, by snapping up bank equities such as SocGen, BNP Paribas or UBS.

Davide Serra, founder of Algebris, has been even more successful trading in bank hybrid securities. Algebris is up 55 per cent so far this year.

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