NEW YORK (Reuters) – It is a good time to be a U.S. stock investor for the long term – if you can ignore the noise erupting every few hours.

That is the advice from some money managers, who are taking the opposite tack of many who want to avoid the turbulence. Instead, they are confronting the volatility head on, adding to stock allocations rather than standing pat.

Much of their increased optimism stems from a belief the U.S. economy is likely to avoid another recession, even as a European downturn seems more likely.

Because of that, they believe the euro zone's debt crisis, which has kept the market on its toes for months, will recede as the main driver of market direction. A Reuters poll of 12 U.S. fund companies showed managers in December boosted equity holdings to their greatest percentage this year.

But for those worried investors who have been out of the market for a while, Shawn Kravetz, president of investment management firm Esplanade Capital, suggests starting small.

"You should start to deploy capital into the stock market gradually and, in the coming months if it's up, you keep doing it. If it's down, you get a little bit more aggressive," said Kravetz, who favors large retailers, including Lowe's (LOW.N), Target (TGT.N) and Wal-Mart (WMT.N).

U.S. economic data has improved in recent months. That is likely to help U.S. companies continue to report healthy profits, among the biggest tailwinds for stocks in 2012.

But there remain many reasons to be wary. Even optimistic money managers acknowledge that Europe's debt troubles are far from over and the fallout could still extend to the United States, especially the U.S. financial system.

Cautious retail investors overall still prefer bonds and cash to stocks. Assets under management at all equity funds dropped by $186 billion for the year through December 12, according to Thomson Reuters' Lipper. For the same period, assets under management at all taxable bond funds rose by $69.8 billion.

The well-worn arguments about attractive valuation have not won the day in 2011. The benchmark Standard & Poor's 500 (.SPX) appears headed for another losing year, despite valuations that have not been this low in a decade.

The index is down 4.2 percent for the year, and stocks have been on a topsy-turvy path for months, showing strong gains one day, only to slump the next.

By contrast, investors in the Barclays U.S. Treasury Aggregate Bond index are sitting on returns of nearly 10 percent for 2011, according to Barclays Capital. That's despite a bevy of predictions that the bond market had nowhere to go but down this year.

STOCKS GO THEIR OWN WAY

Major asset classes have traded in tandem with one another for the last several months. The euro, commodities, stocks and sovereign credit markets have been increasingly linked because of fears of a financial meltdown in Europe.

The tight relationship between stocks and the euro has diminished in the last month, however. In October, the euro and the S&P 500 nearly matched each other in the direction and magnitude of their moves. The rolling 22-day correlation coefficient, which represents how close a relationship the two assets have, was last at 0.14.

A perfect relationship is 1, with 0 making two assets essentially unrelated. In late October, the correlation was routinely above 0.9.

High trading correlations between stocks in the same sector have resulted in many "mispriced" stocks, said Craig Hodges, president at Hodges Capital Management in Dallas, Texas.

"Equities move in lockstep day in and day out, irregardless of individual fundamentals. What you have are situations where babies are thrown out with the bath water," said Ken Farsalas, who manages a small-cap growth fund at Oberweis Asset Management in Lisle, Illinois.

The price-to-earnings ratio of the S&P 500, a measure of the price paid for a share relative to the company's profit, is low by historic standards. The S&P 500's forward P/E ratio of 11.3 is at its lowest in more than a decade, S&P data shows.

One approach to investing in stocks today is to aim for global diversification, according to Todd Petzel, chief investment officer at Offit Capital Advisors.

"If you focus on global franchises with good cash flows, the stocks still are trading at very reasonable multiples and have very good prospects," he said.

Petzel also noted mortgage real estate investment trusts, or REITs, are good bets for retirement accounts, because of the steady stream of cash and low valuations. "We think the cash flow is very good and steady and they're trading at very near book value these days."

Annaly Capital Management (NLY.N) and MFA Financial (MFA.N) are in his retirement plan and many of his firm's clients' plans.

Valuation has proved a tough sell in the last several months. Banks, which trade at less than the value of the assets on their books, were hit again on Monday.

Calm periods in markets have been brief this year. Markets do not often repeat the stomach-churning periods that marked August through October, but Tobias Levkovich, chief equity strategist at Citigroup Global Markets, says recent declines in volatility may still prove transitory.

Many see the market's choppiness as here to stay, and suggest investors accept it.

"It's painful, it's hard, but sometimes it's better to turn off (the news) and take a step back," Farsalas said.

(Reporting by Caroline Valetkevitch; additional reporting by Daniel Bases; Editing by Dan Grebler)

NEW YORK – Ask the people who invest billions for a living to name their favorite picks for 2012 and you’ll get a smorgasbord worthy of a holiday party: Brazilian stocks, U.S. junk bonds, and government debt from Colombia. Ask them what they dislike and they’ll name one of the top-performing investments this year: U.S. government bonds.

Investors can rattle off a long list of reasons to avoid Treasurys. They pay next to nothing and are bound to plunge in value whenever interest rates begin climbing from their historically low levels. It seems nobody likes Treasurys, yet everybody keeps buying them anyway.

“Our least favorite asset is Treasurys,” said Christine Hurtsellers, chief investment officer for fixed-income at ING Investment Management during a recent press briefing. “We still have a lot, but it’s hard to make the argument for them.”

It’s a tricky problem for bond-fund managers at a time when everyday Americans are trusting them with more of their savings. Among investors, there’s a solid belief that Treasury prices must fall and push interest rates up at some point. But those who have bet on a Treasury market collapse this year got burned.

Bill Gross, the bond-world version of investment sage Warren Buffett, dropped nearly all Treasury holdings from the fund he manages at Pimco in early 2011. He argued that if Republicans held up lifting the government’s borrowing limit, the country would risk default. Borrowing rates would spike as the world’s investors dropped U.S. government debt, just as they have in Europe.

Most of what Gross predicted came true. The debt-limit fight raised worries about default and led to Standard & Poor’s taking away the country’s AAA credit rating in early August. But instead of spiking, U.S. borrowing rates plunged as traders sold everything else to buy U.S. government debt. The race into Treasurys helped drive the entire bond market up 3.8 percent from July to September. Gross got the big picture right but his big bet against Treasurys didn’t pan out. Pimco’s Total Return Fund lost 1.2 percent, its worst quarterly performance in three years.

It’s been a recurring story since the financial crisis hit in 2008. For three years running, pundits have predicted that investors will eventually refuse to finance the U.S. government’s $15 trillion in debt and the Treasury market will collapse. But worries over the U.S. economy and the perilous state of Europe’s financial system keep drawing banks and money managers from around the world back to the U.S. dollar and Treasurys.

That demand continues to push U.S. government bond prices up, the main reason why the Treasury market has returned 8.5 percent this year, despite microscopic yields, according to Bank of America-Merrill Lynch data. The benchmark for stock market funds, the S&P 500 index, has returned less than 1 percent, including dividend payments, and that’s with a 7.4 percent surge over the past week.

“It’s been a pretty strong year for bonds,” said Michael Gitlin, director of fixed income at T. Rowe Price, “and it’s largely a result of Treasurys.”

Judging by the gauges money managers usually check before making a move, buying Treasurys still looks like a bad idea. Consider this sample:

(asterisk) The benchmark 10-year Treasury pays just 2 percent a year. Take inflation into account and the payout on Treasurys equals negative 1.5 percent, what finance types call the real rate.

(asterisk) Treasury yields pay less than top-grade corporate bonds at 3.7 percent and even less than the stock market’s 2 percent dividend yield.

“My colleagues say there’s little value in 10-year (Treasurys) and I’d agree,” Gitlin said. “People have been saying there’s a fixed-income bubble. No, there’s a Treasury bubble.”

If there’s so little to like about U.S. government bonds, why are the world’s investors still buying Treasurys instead of dumping them? In a word, it’s Europe.

As the crisis seemed to spread from country to country this year, the world’s traders plowed more money into Treasurys. The higher the demand for U.S. debt, the lower the interest rate, or yield. So when it looked like Greece might default on its debts earlier this year, the yield on the 10-year Treasury note sank below 3 percent. And when attention turned to Italy and its government debts the yield sank even further, dipping below 2 percent in September. The shift of money out of Europe and into the U.S. has pushed Europe’s borrowing rates to dangerous levels while causing U.S. interest rates to sink.

“You can hate the budget situation and hate the low yield, but if there’s a panic it’s the asset that outperforms,” said Robert Robis, head of fixed-income strategy at ING Investment Management.

A good reason to hold Treasurys, in other words, is that the Treasury market remains the world’s favorite hiding spot. So, for many fund managers Treasurys aren’t exactly an investment. Buying Treasurys is like taking out an insurance contract, Robis said. They’re protection against global financial trouble.

The ING Global Bond fund, for instance, has 15 percent of its $641 million in Treasurys, less than the 20 percent in the benchmark Barclay’s bond index. Robis said having none would be like betting European governments will come to a quick solution to the region’s debt crisis and that the U.S. economy will soon recover its health.

“There’s still a need to hold Treasurys,” Robis said. “Just don’t expect to make a fortune off them.”

BOSTON (Reuters) – August was a rotten month for stocks and it wasn't much kinder to some of the world's most successful hedge fund managers, early returns show.

Even some of the industry's titans, including Steven Cohen, Dan Loeb and David Einhorn, couldn't escape the global sell-off at the start of the month and finished August in the red.

Cohen's SAC Capital Advisors lost about 3 percent, Loeb's Third Point Offshore Fund fell 2.8 percent and Einhorn's Greenlight dipped 1.4 percent, people familiar with their returns said on Thursday.

While Cohen and Loeb remain in the black for the year — SAC is up about 7 percent while Third Point is 3.9 percent higher — many others haven't been so successful. Einhorn, who made headlines this summer with a now collapsed deal to buy a stake in the New York Mets baseball team, is off nearly 5 percent.

Whitney Tilson's T2 Partners LLC told investors that the fund declined 13.7 percent last month, leaving it off 22.1 percent for the year.

"On the long side, our portfolio got clobbered across the board despite generally good company-specific news regarding our major holdings," Tilson said in a letter.

What hurt Tilson likely also led to more red ink at his college friend William Ackman's Pershing Square Capital Management. Ackman was already off double digits earlier in the month. So when Tilson said that losses in Citigroup, General Growth Properties, and J.C. Penney swamped his portfolio, they likely inflicted similar damage on Ackman, who also owned shares of the companies.

But the industry's most prominent loser is still John Paulson, the billionaire investor who misjudged the pace of economic recovery and was badly battered in financial stocks. His flagship Advantage Funds are still off between 25 percent and 35 percent for the year, one investor said.

For August, which began with a dramatic market sell-off and ended with tropical storm Irene drenching east coast hedge fund hubs in New York and Connecticut, hedge funds, on average, lost 5.85 percent, Hedge Fund Research data shows. That compares with 4.4 percent drop suffered by the Dow industrials, which made for the worst August in a decade, and the 5.61 percent drop registered by the S&P 500.

Hedge fund returns are often closely guarded secrets, so any information on how some of the top names are performing is closely monitored. Performance trackers like Hedge Fund Research are expected to release general statistics next week.

While the losers may be stealing the limelight, there are also some prominent winners who have generally positioned their portfolios for a drop in the markets.

The Renaissance Institutional Equities Fund, founded by mathematician turned hedge fund manager James Simons, returned to form earlier this year and gained 5.4 percent in August, leaving it up 25.6 percent for the year, an investor said. The Renaissance Institutional Futures Fund gained 6.6 percent in August and is up 9.16 percent for the year, the same person added.

Kenneth Griffin's Kensington/Wellington fund at Citadel also ended the month with gain, as it climbed 1 percent to be up 15 percent for the year, an investor said. Griffin's Global Equities fund gained 1.6 percent in August and is up 14 percent for the year.

(Editing by Steve Orlofsky)

WASHINGTON (Reuters) – An ex-Moody’s Corp derivatives analyst said the credit-rating agency intimidated and pressured analysts to issue glowing ratings of toxic complex, structured mortgage securities.

In a 78-page letter to the Securities and Exchange Commission, William Harrington outlined how the committees that make the ratings decisions are not independent and how managers often intimidated analysts.

“The management of Moody’s, the management of Moody’s Corporation and the board of Moody’s Corporation are squarely responsible for the poor quality of previous Moody’s opinions that ushered in the financial crisis,” he wrote.

“The track record of management influence in committees speaks for itself — it produced hollowed-out (collateralized debt obligation) opinions that were at great odds with the private opinions of committees and which were not durable for even a short period after publication,” he added.

Harrington’s August 8 letter, which was sent in response to a 517-page proposal by the SEC on credit-rating regulations, raises similar issues that are already at the heart of a Justice Department probe into McGraw-Hill’s Standard & Poor’s.

“We cannot emphasize strongly enough the importance Moody’s places on the quality of our ratings and the integrity of our ratings process,” said Moody’s Corp spokesman Michael Adler. “For that very reason, we have robust protections in place to separate the commercial and analytical aspects of our business, and our ratings are assigned by a committee — not by any individual analyst.”

The Justice Department has been looking into what S&P analysts wanted to do with ratings during the financial crisis, and what they were told to do, according to one source familiar with the matter.

A second source has said the department also has been investigating Moody’s in connection with structured product ratings during the crisis, although the exact focus on that probe is unclear.

Earlier this year, a U.S. Senate panel led by Michigan Democrat Carl Levin found that Moody’s and S&P helped trigger the financial crisis after the two rating agencies gave overly positive ratings to toxic mortgage-related products and then later downgraded those ratings en masse.

Last year’s Dodd-Frank Wall Street overhaul law tightens regulations for raters, including improving the transparency of the methodology used and curbing potential conflicts of interest. The SEC in May issued a proposal seeking comments on many of the Dodd-Frank provisions on rating agencies.

Harrington, who said he worked as an analyst in the derivatives group from 1999 until July 2010, said he thinks that if the SEC’s proposed rules had been in place in 2002, they would still not have gotten to the heart of the problems at Moody’s.

“Many of the proposed rules still give more license to the management of Moody’s to step up its long-standing intimidation and harassment of analysts, to the detriment of opinion formation,” he said.

(Additional reporting by Jeremy Pelofsky)

WASHINGTON – A federal judge has frozen the assets of a hedge fund manager after federal regulators alleged he used at least $53 million from clients to benefit himself.

The Securities and Exchange Commission announced Friday that U.S. District Judge Janet Bond Arterton issued an order, which blocked Francisco Illarramendi and his firm, Michael Kenwood Capital Management in Stamford, Conn., from accessing company funds. The SEC has said Illarramendi siphoned investors’ money from several hedge funds he manages, in a lawsuit accusing him of civil fraud.

The agency said it asked the judge to freeze the money because Illarramendi planned to use it to make more personal investments. Illarramendi and his attorney couldn’t immediately be reached for comment. The SEC also is seeking fines and restitution.

BOSTON (Reuters) – Top hedge fund managers went bargain hunting in the oil patch in the second quarter, buying shares whose prices had tumbled after BP’s Gulf of Mexico well disaster and in the face of lower oil prices.

Top managers including Carl Icahn, Eric Mindich and Dinakar Singh, whose stock picks are closely watched in investment circles, added energy stocks to their holdings even as billions of gallons of oil gushed into the Gulf, according to quarterly securities reports filed on Monday.

Others stocking up on energy shares included David Einhorn, former Fidelity Investments star Jeff Vinik, the $22 billion Boston-based fund Adage Capital and SAC Capital Advisors LP, the hedge fund run by Steven Cohen.

Fund managers must say what U.S. listed equities they own within 45 days after the quarter ends.

Energy stocks ranked among the worst performers during a quarter that also featured the still unexplained stock market “flash crash” on May 6 and new jitters about a double-dip recession developing in the United States.

Still, top fund managers staked out the sector much like they did with financial companies earlier in the year.

For investors bold enough to jump into the energy sector while the Gulf oil spill was gushing and doubts swirled about the future of U.S. offshore oil drilling, the payoff has been swift and handsome.

In particular, BP’s (BP.L) (BP.N) shares are up 28 percent since the end of the second quarter, after losing roughly half their value in the weeks that followed the explosion and sinking of the Deepwater Horizon drilling platform in the Gulf of Mexico in late April.

After building his energy holdings slowly at the start of the year, billionaire Carl Icahn picked up the pace, committing nearly $1 billion to the sector during the quarter.

Icahn also picked up shares of oil and gas producer Anadarko Petroleum (APC.N) and offshore drilling specialist Ensco Plc’s (ESV.N) sponsored American Depository Receipts, according to documents submitted to the Securities and Exchange Commission on Monday.

Other companies that attracted interest from one or more hedge funds included drilling services specialist Baker Hughes (BHI.N) and oil services company Halliburton (HAL.N).

Mindich, whose skills at Goldman Sachs helped him raise a record $3 billion when he started his fund in 2004, bought both shares and call options in BP, and a variety of other companies in the sector: Diamond Offshore Drilling (DO.N), Forest Oil (FST.N), Marathon Oil (MRO.N), Plains Exploration & Production (PXP.N) and Suncor Energy (SU.TO).

Einhorn’s Greenlight Capital bought just over 5 percent of Ensco’s shares. In a letter to investors last month, Einhorn said the Gulf oil spill “should not materially impact (Ensco’s) long-term potential.”

Einhorn’s other actions centered mostly on technology, where he boosted exposure to Microsoft Corp (MSFT.O) and Xerox Corp (XRX.N), and took a stake in Apple Inc (AAPL.O).

The forms managers filed on Monday include only U.S.-listed equity securities and related derivatives. Bonds, other securities and short positions are typically not disclosed. Managers may also omit U.S.-listed equities under certain circumstances or file some holdings on confidential filings.

Einhorn and John Paulson of the Paulson Funds were among the managers taking larger stakes in drugmaker Pfizer Inc (PFE.N).

Paulson> also raised a few eyebrows by picking up one million shares of Goldman Sachs Group (GS.N) in the second quarter.

Paulson’s was the hedge fund at the heart of the SEC’s civil fraud case against the Wall Street bank. In April, the SEC charged Goldman with failing to disclose that Paulson’s fund had a hand in picking securities for a complex mortgage-related deal that the hedge fund was betting against.

Regulators did not charge the fund with any wrongdoing, but his investors became so nervous that he was forced to hold a series of conference calls to explain the matter.

(Reporting by Svea Herbst-Bayliss and Aaron Pressman. Additional reporting by Emily Chasan in New York and Ross Kerber in Boston; Editing by Robert MacMillan and Steve Orlofsky)

BOSTON (Reuters) – Top hedge fund managers went bargain hunting in the oil patch in the second quarter, buying shares whose prices had fallen because of BP’s Gulf of Mexico well disaster and lower oil prices.

Top managers including billionaire Carl Icahn, Eric Mindich and Dinakar Singh, whose stock picks are closely watched in investment circles, added energy stocks to their holdings as billions of gallons of oil gushed into the Gulf, according to quarterly securities reports filed on Monday.

Others buying energy shares included David Einhorn, former Fidelity Investments star Jeff Vinik and the $22 billion Boston-based fund Adage Capital.

Fund managers must say what U.S. listed equities they owned within 45 days after the quarter ends.

While energy stocks ranked among the worst performers during a quarter that also featured a still unexplained flash-crash and fresh fears that the U.S. economy would recover more slowly, hedge fund managers staked out the sector much like they had with financial firms earlier in the year.

After building his energy holdings slowly at the beginning of the year, Icahn picked up the pace in April, May and June by committing nearly $1 billion to the sector after the Deepwater Horizon drilling platform at BP’s (BP.L) Macondo well exploded and sank in the Gulf of Mexico.

The purchases included 2 million shares of oil and gas producer Anadarko Petroleum (APC.N) and 240,000 shares of offshore drilling specialist Ensco PLC’s (ESV.N) sponsored American Depository Receipts, according to documents submitted to the Securities and Exchange Commission on Monday.

Icahn also added 2.4 million shares of NRG Energy (NRG.N), a big power utility.

Dinakar Singh’s hedge fund TPG-Axon bought 1.4 million shares of Anadarko, while adding 2.1 million shares of drilling services specialist Baker Hughes (BHI.N) and 3.5 million shares of Halliburton (HAL.N), another major oil services player.

Mindich, whose skills at Goldman Sachs helped him raise a record $3 billion when he started his fund in 2004, bought 1.3 million shares of BP and call options to buy 1 million more.

Mindich’s $13 billion Eton Park Capital also bought 168,000 shares of Baker Hughes, 165,000 shares of Diamond Offshore Drilling (DO.N), 300,000 shares of Forest Oil (FST.N), 256,000 shares of Marathon Oil (MRO.N), 420,000 shares of Plains Exploration & Production (PXP.N) and 237,000 shares of Suncor Energy (SU.TO).

Vinik added 3.1 million shares of Exxon Mobil, 11,000 shares of Ensco and 2 million shares of the Oil Services HOLDRS Trust (OIH.P), which owns a basket of 15 stocks in the sector.

Einhorn’s Greenlight Capital bought 7.4 million shares of Ensco, just over 5 percent of the company’s shares. Ensco “was not involved in the horrible accident, which should not materially impact the company’s long-term potential,” Einhorn wrote in a letter to his investors last month.

Adage, run by former managers from Harvard University’s endowment, owned 3.4 million shares of BP at the end of the quarter, up from 124,000 three months earlier. The firm added to existing positions in Anadarko, Ensco and Halliburton.

The bets mark a dramatic change in their portfolios, coming as many other investors pulled their money out. BP’s stock price fell over weeks until its value had fallen by half.

Even prominent mutual fund manager Fidelity Investments, where millions of Americans hold their college savings and retirement accounts, appears to have joined the trend.

Fidelity managers added 24.2 million shares of Exxon, leaving it with 74.9 million shares, making it the fifth biggest holding for Fidelity. It also added 10.9 million shares of BP.

The forms managers filed on Monday include only U.S.-listed equity securities and related derivatives. Bonds, other securities and short positions are typically not disclosed. Managers may also omit U.S.-listed equities under certain circumstances or file some holdings on confidential filings.

(Reporting by Svea Herbst-Bayliss and Aaron Pressman. Additional reporting by Emily Chasan in New York and Ross Kerber in Boston. Editing by Robert MacMillan)