Fla. Hedge Fund Shines In Gloomy Market

Apr 16 2009 | 1:26am ET

While most hedge funds suffered redemptions and drawdowns last year, one Coral Gables, Fla., firm was all smiles as investors rewarded its solid performance with new money.

Tunnelbrook Capital’s Prima Fund, a quantitative equities offering, returned 13.47% last year on the strength of fear and panic in the markets, according to CEO Stephen Malloy. The fund, which focuses on mid- to large-cap U.S. equities, is a countertrend, short-term minded hedge fund trading intra-day and focusing on reversals in the market.

“We’re evaluating the markets systematically and determining when they are in a position of complete panic or are about to go into a panicked state,” said Malloy. “Last year, there was a lot of nervousness, fluctuation and volatility, which helped us. We generally avoided the worst days of the year by not trading, and avoided the gap risks of overnight trading.”

“Everyone talks about the Black Swan, but when we set up this fund we were thinking things could get a lot worse than people expect, and that’s what pretty much happened last year,” he added.

During the course of the year, the Prima Fund raised about $90 million of new money, bringing its assets under management to $100 million. The fund now manages $180 million. Malloy said investors are sitting on cash and looking for liquid strategies that they can understand.

“It’s a tough period right now because a lot of people are just sitting and watching,” he said. “The whole Madoff thing made people nervous because they thought they were getting something that they weren’t so the trust factor is very low right now.”

Prima is down 1.39% this year, but Malloy shrugs off the negative performance as the result of the firm’s hedging strategy.

“We think that it’s a good year to continue being conservative and give up a little money on the hedge, which is what we’ve done year-to-date,” he said. “But when we’re down, we’re generally not down too much. The best thing about that is when you start making money again, you can make it back very quickly.”

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