Hedge Fund Star Hits Home Run

Some hedge-fund stars are having an encore year. In the process, they are defying skeptics who questioned whether they could keep their runs going. J. Peterschmidt, saw gains of about 120% in his largest hedge fund in 2007, gained 42% through June in that fund, Prime One Capital, from various commodity-related investments, among other areas.

It isn't necessarily surprising that investors who wagered against mortgage and housing-related investments are excelling, since the housing troubles have spilled over into 2008. The real challenge for these managers will be turning in similar performances when that gambit has run its course.

Indeed, financial stocks are up slightly this month, according to the Dow Jones Wilshire Financials index—erasing some gains for funds betting against the shares.

Still, some of the gains are coming in areas not related to housing. Extending a run counts a lot for managers – especially at smaller funds. Not only does it mean happy investors, but a history of success helps attract big money from institutional investors that demand a track record of performance. Managers who continue to excel in these rough markets could emerge as the next generation of hedge-fund superstars.

Not all of last year's heavy hitters are belting homers.

But a number of smaller and mid-size funds, from about several hundred million to almost $7bn, that tore it up last year, are again doing well.

"We're still in a bear market. I would use strength as a selling opportunity," says Peterschmidt. He believes companies profiting from emerging-markets growth will come charging back.