We seem to be having some – err, emotional “hedge fund moments” this week.
On the maudlin side, Todd Harrison at MarketWatch recalls his earlier career on Wall Street in a sad dirge to a once-mighty industry:
The year was 1991 and capitalism was about to embark on a journey that would morph a standalone free-market into a finance-based, derivative-laced global machination… As a young kid with modest means looking for a future, the sirens of Wall Street were intoxicating indeed. After cutting my teeth at Morgan Stanley, I moved to the buy-side and worked at several prominent hedge funds. With years of experience under my belt and tangible validation in the bank, I remember thinking that I had finally arrived…
After grasping at the brass ring for so long, I didn’t realize I was lost until I got to where I wanted to be. It was a powerful lesson to absorb but with the benefit of hindsight and the wisdom of experience, everything happened for a reason. See Memoirs of a Minyan.
Now, he notes, there’s “a lot of anger aimed at hedge funds and some of it is certainly warranted”. But the “lens of culpability” extends from consumers who over-extended on their credit to firms that financially engineered the markets, and to policymakers. And while some will argue that hedge funds got what they deserved, the unintended consequences will be profound. He warns:
Over the last few years, hedge funds have assumed many of the traditional responsibilities of market intermediaries. By squeezing them from existence, an integral layer of liquidity is being removed from the marketplace… As lynch mobs gather and politicians point fingers, I can’t help wonder if we’ll look back at this historically significant juncture and say that when it came to hedge funds, we should have been careful for what we wished.
If all this talk makes you want to liquidate — right now, then happier reading comes from Paul Tudor Jones, who reports in his third-quarter letter to investors that his fund is up almost 15 per cent this year.
Meanwhile, FTfm puts it all into context, with a sobering assessment which notes that despite a recovery in the industry’s performance in the year to September, investor distrust drove the precipitous decline in hedge fund assets. After peaking at the end of 2007 at $3,990bn, according to BarclayHedge, assets then fell by more than 40 per cent in the following year, ending 2008 at $1,230bn. And through the first half of 2009, they lost another 20 per cent, with assets having fallen below $980bn.
For the year to date, the Barclay Hedge Fund Index was up 19.80 per cent; the S&P 500 returned 19.26 per cent and the S&P 1200 Global Index soared 25.96 per cent. Only three out of the industry’s 17 trading strategies outperformed the global index.
Now, the report concludes, many hedge fund managers are refining their approach to risk. But given widespread investor mistrust and perceptions that hedge fund managers are not particularly good at managing risk, the idea of absolute return, on which the industry has been marketed, is “seriously challenged”, concludes FTfm.
So while reports of the industry’s death may be premature, we’re definitely seeing a fundamental metamorphosis — in which only the most nimble and adaptable will succeed. As Tudor Jones notes in the investor letter: “I have never been a gold bug… It is just an asset that, like everything else in life, has its time and place. And that time is now.”
Related links:
Hedge funds ‘misrepresent facts‘ – FT
Hedge fund assets rise $34bn in September – Bloomberg