Steven Cohen is a changed man according to the description given by Doug Haynes, president of Point72 — the thousand-person operation dedicated to growing the billionaire art collector’s fortune.
The Mr Cohen of old was a snarling and aggressive trader who dominated the giant trading floor at the heart of SAC Capital, his Connecticut hedge fund renowned for its unmatched investment performance and fees. His dedication to the desk was stuff of Wall Street legend, at one point causing him to be late to the birth of a child. His was the trading book which mattered, pouring money behind underlings’ bets as the mood took him, the centre through which good ideas must flow.
Now though Mr Cohen will regularly take time out of the trading day just to mentor young staff, part of the apprenticeship culture at the firm, according to Mr Haynes:
He meets with a portfolio manager and their team three or four days a week usually for breakfast, usually for an hour, an hour and a half, purely to to provide coaching. It’s not an evaluation, its not a review, he just digs in and shares his experience. He probably does that on ad hoc basis two or three times a day, through the course of the day.
The average hedge fund, as estimated by HFR, increased the value of client investments by 2.4 per cent in the first half of the year, even after most hedge funds lost those clients money in June.
By comparison, the S&P returned 1.2 per cent, including dividends, and the Vanguard Total Bond lost o.2 per cent in the first half of the year, meaning a 60:40 combination grew in value by 0.6 per cent.
A welcome return of volatility? Read more
Dedicated short sellers are a rare breed which has become even rarer in the last five years.
More hedge funds have closed in the last decade than were open for business at the start of it, according to industry numbers from HFR.
A total of 9,000 hedge funds and fund of funds have liquidated since the start of 2005, almost as many as HFR estimates exist now: 10,150. At the end of 2004 there were around 7,500 funds offering to manage cash.
The figures are a reminder of the transient nature of such high fee investment vehicles, which on average survive for only five years. The rapid turnover adds to questions about how such vehicles can be suitable stewards of capital for large long term investors such as pension funds. Read more
There are many good reasons not to invest in hedge funds. But there are also bad reasons, one of which was highlighted today in the Wall Street Journal:
Large corporate pension funds have quadrupled the share of their portfolios invested in hedge funds over the past five years, according to an analysis of about 300 firms in the S&P 500 by Wilshire Consulting. During that period, those pensions have lagged behind the performance of the broader stock market in every year but one, according to Wilshire. Their return of 9.7% in 2014 was below 13.7% for the S&P 500, including dividends.
“There’s certainly regret,” said Jim McKee, head of hedge-fund research at Callan Associates Inc., which advises pension funds. “The last five years have been disappointing for pensions invested in hedge funds.”
To see why this reasoning is silly, it helps to take a step back, and remember that defined-benefit pensions are just another kind of financial intermediary. Like insurers and banks, they make a bunch of promises to some people that they expect to fulfill by extracting a bunch of promises from other people. Read more
Barclays have had a look at the reaction of various types of investor since markets started to move around with energy in April.
We find that positioning in bonds has been cut back considerably by asset allocation funds, bonds mutual funds and relative value hedge funds. However, hedge funds are overweight equities while equity mutual funds are underweight. In particular, positioning in European equities is once again extremely low. Finally, the surge in USDJPY has coincided with a surge in yen shorts back toward record levels.
An open letter to active fund managers from the Canadian wealth manager PWL catches the eye.
Not for the newness of its truth, on which more below, but for the jaunty consolation to money managers everywhere after a year when the biggest US public pension fund, Calpers, and the world’s most famous investor, Warren Buffett, both advocated for passive index fund investing.
Right now it may feel impossible to pick the right stocks or guess the market direction, but do not let your confidence wane! You see, for everyone else to enjoy an efficient market, at least a handful of you need to continue your vigorous research and due diligence on securities. Each one of you may only get it right sometimes, but the aggregation of your predictions plays a role in getting accurate information into prices.
Pieria has some stats from Citywire on the tenure of fund managers in its database of 17,000 funds, judged to be one of the important factors that financial advisors say they consider when choosing funds for their clients.
The advisors averaged about two decades worth of experience. The fund managers, not so much. Read more
… That proved to be correct, if you will, and that was my last moment, really. I have to say when I look back in the last three years it feels as if the sun only rose each day to humiliate me after that point.
Hugh Hendry, manager of the Eclectica hedge fund there, talking about his investment decisions back in 2010-11 in the first of a three part interview in Money Week.
The no-doubt galling part is that he was right, to a degree, identifying deflation as the central risk while many of his peers worried about the opposite — central bank measures sparking inflation. Hendry had also been a celebrated contrarian who made a ton of money in the disaster year of 2008.
Still, he too felt the pull of the siren song:
I luxuriated in the polemics of Marc Faber and James Grant and Nassim Taleb, in our own country, Albert Edwards, et al. I luxuriated as they ranted and it was fine for them to rant. But I am charged with the responsibility of making money… *
With back of envelope in hand, lets estimate what the world’s pension funds have paid its hedge fund managers, and what they got back in return.
First we need an idea of how much cash pension fund trustees have placed with hedge funds. Here’s the breakdown of estimates given to us by Preqin, a data provider (click to enlarge): Read more
Joseph and Dan discuss the decision by the largest US public pension fund to ditch hedge funds,
on the set of mastermind.*
The message is starting to get through. Calpers, the largest US public pension fund, has said that it will stop investing in hedge funds.
It took a while. The $300bn California Public Employees’ Retirement System rejigged its portfolio of hedge funds at least three times since it became one of the first pension funds to embrace the fee structure in 2002. The previous decision had been to halve exposure, rather than elimininate it entirely.
Still, public pension fund trustees now have a very visible example to follow. If the largest and best resourced US pension system found the cost and complexity of investing in hedge funds too much to make it worth while, why should they think they can do better? Read more
Not the hedge fund structure, a fee schedule masquerading as an asset class, that is old hat. What we mean is the problem that arises once your pension fund has hired staff to invest in alternative assets.
For instance, consider this nugget of information from a poll of institutional investors conducted by Preqin and written up in COO Connect under the headline Investors to grow allocations to alternatives:
Twelve per-cent of private equity investors and 9% of hedge fund investors said the asset classes had surpassed expectations.
Nomura, as part of an excellent report looking at various aspects of active versus passive investment management, have considered Warren Buffett’s famous bet that an index fund will beat a fund of hedge funds over ten years.
Buffett is winning, and the bank’s conclusion is that this is very far from a fluke:
In our view, alternative assets as a group show consistently poor performance. Beta is high. Alpha is near zero, if not negative. Correlation with standard asset classes is high. Return and diversification benefits are negligible.
More on that below, but first note the proportion of pension fund fees going to the alternative investment fund managers. Never have so few been paid so much by so many for doing so little. Read more
That conclusion, and its consequence — picking good hedge funds that will survive is beyond the ability of big investors like pension funds — has been the central point of this series about hedge fund zombies.
However, reading John Lanchester in the New Yorker on how the jargon of finance obscures and reverses the meaning of words, the simple clarity of the message was striking:
Most hedge funds fail: their average life span is about five years. Out of an estimated seventy-two hundred hedge funds in existence at the end of 2010, seven hundred and seventy-five failed or closed in 2011, as did eight hundred and seventy-three in 2012, and nine hundred and four in 2013. This implies that, within three years, around a third of all funds disappeared. The over-all number did not decrease, however, because hope springs eternal, and new funds are constantly being launched.
The cover of FTfm features some tough Monday morning reading for professionals paid to help investors pick hedge funds:
Roughly a quarter of all hedge funds tracked by Preqin have posted negative returns year to date, though the industry is up 3.2 per cent overall.
One in four is pretty bad for an industry with aspirations to asset class status, when the world has largely been calm and markets positive. Indeed, hedge fund managers are braced for their worst year since 2008. Read more
First-half performance numbers for the hedge fund industry as collated by HFR have arrived. Three up months and three down months leave the industry delivering after-fee gains to investors of 3.2 per cent, on average.
This first half performance is in line with 1H13 gain of +3.2 per cent, though hedge funds posted gains in only three of six months in 2014 in contrast to gains in five months in 1H13. The HFRI Fund of Funds Composite Index was up +0.9 per cent in June, concluding 1H14 with a gain of +2.0 percent but trailing the gain of +3.4 percent for the same period in 2013.
Are you a hedge fund with a prime broker who happens to be a large bank?
Are you worried that said prime broker will no longer be able to make a lot of money from doing business with you, because of new banking regulation such as the liquidity coverage ratio (LCR), the net stable funding ratio (NSFR) or various types of leverage ratios?
Well, then JPMorgan Chase has some advice for you! Read more
To take a tiny bite of a very large subject, what is the ideal asset allocation for a long-term minded investor?
Providing an answer has made a lot of people a lot of money over the years, typically when couched as a response to another unanswerable: how much risk to you want to take? (Er, a bit, but not too much. What do most people do?)
The typical answer that is sold, however, has changed over time as well. Read more
Institutional Investor’s Alpha published its rich list for 2013 this week which, as Matt Levine has described with flair and some made-up maths, is only tangentially related to how well the hedge fund managers in question performed last year:
If you start with a ton of money, and/or your hedge fund has really good returns, you will make a lot of money. Notions of fair compensation for your labor, or appropriate pay for performance, just don’t enter into it. Money begets money, lots of money begets lots of money, and skill in the begetting is a nice bonus.
That post is also his contribution to the burgeoning mountain of Piketty-related comment, and without tossing another pebble onto the pile, it is worth digging a little more into the reasons for those vast fortunes to exist, and why that matters. Read more
First quarter performance results for surviving hedge funds are out. A volatile performance, says index compiler HFR.
For the first quarter, the HFRI [Fund Weighted Composite] gained +1.1 percent, with a strong February gain offsetting declines in both January and March.
February was a good month for the hedge funds, erasing January losses and then some, according to HFR.
The average hedge fund was up 2.1 per cent in February, to leave it up 1.5 per cent for 2014 so far. Read more
When it comes to hedge fund performance there are a lot of excuses deployed to justify the billions of dollars charged in fees every year for sub-par returns.
One is that the benchmark for comparison (we like a simple 60:40 mix of US stocks and bonds) is unfair, that “risk adjusted returns” would demonstrate hedge fund superiority. Another is that hedge funds aren’t supposed to outperform a bull market in stocks, but they proved their worth in the 2008 crisis.
Neither is true. Read more
Bloomberg Markets Magazine has published its annual list of investment returns for large hedge funds. Kudos to Larry Robbins of Glenview for winning the 2013 performance roulette with an 84 per cent return.
An astonishing profit, but representative of the hedge fund industry only as the rare exception. Just 16 hedge funds managing more than $1bn were ahead of the Vanguard 500 index fund as of the end of October, according to the article. Read more
Check out a moment of honesty from sartorial legend and hedge fund veteran Michael Novogratz of Fortress. One paragraph from Institutional Investor captures both the central contradiction of hedge funds and the misguided attempt by institutions to pretend it doesn’t exist:
“It’s hard to teach young traders this,” he says, referring to macro investing. “You’re either good at it or you’re not.” Most asset managers won’t say they’re smart — at least, not in public — because their investors want to hear about a formal investment process that can be taught and repeated. They want alpha to be sustainable. Of course, if the process of delivering can be easily documented, others can – and will – copy it, and returns should go down over time.
We have mentioned the five-year problem before. However, we suspect that the ranks of the zombies will be swelling again soon, because of the simple fact that the five-year track record of stock-trading hedge funds is horrible.
Glance at a Citi Prime Finance report that fees are starting to crumble, and a casual reader might conclude that something is wrong in the house of hedge funds. Perhaps investors have begun to notice well documented problems with performance?
Pressure to offer founders’ share classes or accept seed capital to launch with sufficient amounts of Assets Under Management have pressured management fees down from the industry’s standard benchmark of 2.0%. Our analysis shows average fees for managers with less than $1.0 billion AUM ranging from 1.58% to 1.63%.
The generally excellent Spencer Jakab leaves his zombie repellent behind on Monday, when he speculates in the Wall Street Journal that the formerly decent returns of the hedge fund industry will return once central banks begin to retreat from markets.
The problem is mean reversion. It may be one of the most powerful forces in the investment universe but, as we have said before, it doesn’t apply when you try to compare the zombies of the 1990s and early 2000s to the lumbering, fee eating, industry as it exists today. Read more
Two months to go to year-end, and hedge fund managers are starting to ask their staff for some ideas to get performance up before January rolls around. So how are the still-living ranks of the zombie industry doing?
Broad-based gains for October, says industry data provider HFR: Read more