July Hedge Funds: Best, Worst, Biggest ^[1]

After making much of its fortune by predicting that the U.S. subprime mortgage market would fall apart in 2007 or 2008, the Whitebox Multi-Strategy fund has gotten to like the country more and more. First, it bought distressed corporate debt, betting correctly that prices would recover along with the country's economy. More recently, the hedge fund has purchased dividend-paying U.S. companies, even including some banks.

"Investors are too pessimistic about American politics, its economy, and the 'fiscal cliff,' " says Jason Cross, a portfolio manager who also serves as the parent firm's (also called Whitebox) head of global equity. Another financial crisis is unlikely. "We don't see that. The market is misguided. In 2008 the financial companies were the ground zero of problems; today it is Europe and China that are the epicenters" for the next crisis, says Cross. The dysfunction of Congress "is a concern, but they will kick the problems down the road. If you look out two years or more, the U.S. is better positioned than Europe or Japan. We believe in the renaissance of manufacturing in this country," he says. As a result, Whitebox is "enthusiastic about quality large-caps." Within that group are U.S. banks, which have written down their balance sheets and reduced leverage, he notes.

CROSS'S VIEWS CARRY SOME WEIGHT not only because his firm was right before but because he's a pretty smart guy. The 41-year-old joined Whitebox in 2001, after working at Oak Hill Platinum Partners for Myron Scholes, a Nobel Prize winner and co-inventor of the Black-Scholes options model. Cross, who earned a Ph.D. from Yale in statistics in 1999 and an M.B.A. from the University of Chicago in 2007, helped put together models for long-short strategies at Oak Hill with Scholes, a fellow