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. Read more
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%. Read more
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
To regulators, naysayers and haters, the hedge fund industry has had one trump card to play for years: hey, we didn’t cause the financial crisis.
Cause the crisis? Maybe not. But a staff report lands from the New York Fed which suggests hedge funds did at least make it worse, adding to disruption in the credit markets that helped to seize up funding for US companies after Lehman Brothers collapsed. Read more
Hackles were raised across the managed futures industry this month by a Bloomberg exposé of high fees and poor performance. (One we used to riff on diversification as the asset management bait and switch).
Attain Capital has taken to its blog to respond. You can read their extensive and detailed response, including rebuffs from the editors of Op-Ed pages here, but we thought we would summarise the main points and then add a few of our own below. Read more
Fresh from having made $1bn impeccably timing the putative US recovery in the first half of this year (and Japan, natch), Andrew Law of Caxton Associates – one of the world’s most successful macro traders – has now turned bearish, and in quite a big way.
Caxton, a hedge fund named after the printer (its now-retired founder Bruce Kovner is a billionaire bibliophile), believes the Fed will keep running its presses:
We have been expecting the US economy to reach escape velocity led by housing and corporate capital expenditure… but for whatever reason that just hasn’t happened…tapering is off the table for the foreseeable future.
Caxton is long across the US yield curve (the debt debacle has been a good buying opportunity, if nothing else). Mr Law has spoken extensively with us about his view on the global economy and the state of the hedge fund industry. Tree-based publishing issues mean those thoughts came in truncated form. Below are some extended excerpts from him. Read more
Common Sense Investment Management has not joined the ranks of the walking dead, quite yet.
However, the fund of hedge funds — which until August managed $3.2bn — has seen investors pull 90 per cent of assets since the firm’s founder was arrested in connection to a prostitution sting, according to CNBC. Read more
We’ve been looking recently at the false promises of a zombie hedge fund industry. Now let’s widen the lens a little to take in asset management more broadly, and the self-interested warping of a concept at the heart of investing.
Start with this terrific piece from Bloomberg, about how investors have been gulled by the supposedly respectable brokers of Wall Street selling investment products known as managed futures. Read more
The latest monthly performance figures for the hedge fund industry are out — and those funds still breathing had a good-ish month, up 1.6 per cent on average in September, according to HFR.
September performance was led by Equity Hedge strategies, with the HFRI Equity Hedge Index gaining +2.6 per cent, also the strongest month since January and bringing performance for the first three quarters of 2013 to a gain of +9.2 per cent, leading all hedge fund strategy indices.
But performance ain’t so hot as that put out by the industry’s legions of undead predecessors. Those cautious equity hedge funds have put up less than half the return for the S&P 500 this year. Read more
We interrupt this blog to announce a zombie apocalypse has occurred. Please remain calm and do not adjust your allocations, many hedge funds remain open and fee structures are intact.
And enjoy sub-par returns for the next 12 months.
No, this is not FT Alphaville’s marketing department shooting itself in the foot. This is the conclusion of a recent paper examining the effect of advertising on hedge funds’ inflows and returns. Read more
Clive Capital, the commodities hedge fund founded by Chris Levett, is no more.
Read and weep (for the super-cycle):
We hear that this year’s exodus from the US muni bond market by retail investors, nervous about the coming bond pain (from higher rates and Detroit nerves rather than predictions of default and disaster), has fixed income hedge funds dipping into the $4tn market.
Hence positive momentum for muni’s last week, which Citi declared was “swimming against the bond fund tide”. Read more
The financial crisis was tough for hedge funds: some collapsed, some merely lost half of their investors’ carefully managed capital, while others swallowed the key to the safe and said no one would get their money back until the panic was over. Winners were few and lucky.
But here’s the thing that we don’t think many people have noticed yet: since the start of 2009 the US stock market has returned eight times as much as the average hedge fund.
As bad as the crisis was, its passing into memory will make hedge funds look far worse than when the industry had the excuse of Lehman’s failure to hide behind. Read more
Before anything, go read Josh Brown and come back.
The total number of extant hedge funds is again above 10,000 and industry assets also continue to reach new highs, though in recent years it’s been overwhelmingly driven by market returns rather than investor net inflows. (To a greater or lesser extent than is usual for multiple consecutive years of robust risk-asset performance, I don’t know.) Read more