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
Grant Capital Partners is being shut down. This hedge-fund manager wind-down is brought to you by Geoff Grant, one of the same gentlemen behind Peloton Partners’ enormous fall.
Fun fact from the FT’s Sam Jones:
Grant Capital eschewed the asset-backed securities and heavy leverage that led to the downfall of Peloton and focused on highly liquid instruments such as currencies, bonds and interest rate derivatives.
While funds that specialise in trading mortgages have enjoyed some of their best returns in the past two years, global macro funds have floundered.
Oops. Read more
… or something. You can’t make these people up:
[Anthony] Scaramucci, the organizer of the dinner, told me the next day that the guests had witnessed the “activation” of a “sleeper cell” of hedge-fund managers against Obama. “That’s what you see happening in the hedge-fund community, because they now have the power, because of Citizens United, to aggregate capital into political-action committees and to influence the debate,” he said. “The President has a philosophy of disdain toward wealth creation. That’s just obvious, O.K.? We talked about it all night.” He later said, “If there’s a pope of this movement, it’s Lee Cooperman.” Read more
At around 8.20am this morning, there was some news from the Theatre-Casino in Zug.
Xstrata had adjourned EGM for the $80bn merger following a “development”. Read more
It’s an indirect path from one to the other.
Gawker on Thursday unloaded some 950 pages of filings from Bain Capital-affiliated offshore funds in which Mitt Romney has invested his fortunes over the years. We’re still reading through the docs, though Dan Primack (who’s already read through them) thinks there’s not much to the issue. Read more
From the New York Times, a Gretchen Morgenson report into an apparently widespread practice of Wall Street analysts giving private equity clients and hedge funds a heads up into their thinking, via the hedgies’ monthly or quarterly “questionnaires”:
The funds say they ask only for public information, but in at least four cases, documents from Barclays Global Investors, now a unit of BlackRock, state the goal is to receive nonpublic information. Two documents state that the surveys allow for front-running analyst recommendations. Read more
From an engaging speech by Robert Jenkins — former F&C chairman, now a member of the Bank of England’s interim Financial Policy Committee — to the “trillion dollar generation” of hedgies at the Gaim conference in Monaco…
My third and final observation is that the days of instant market pricing and limitless liquidity may be fading. The “great moderation” conditioned many to underestimate credit risk. It also bred a generation of traders, money managers, bankers and risk officers to presume an unfettered flow of capital and instant access to narrow bid/offer spreads. Those of you who operate in less liquid instruments do not need reminding. You deal with it daily. Those of you who traded asset backed securities in 2008 can testify to the speed with which liquidity can disappear. Yet despite these examples, many continue to assume that at the currently liquid end of the trading security spectrum “liquidity” is free and will be freely available. Short term traders count on it; algo-trading depends on it. Long/short strategies presume you can short. Stop-loss disciplines demand you can cover – and cover quickly. Read more
One other thing from Wednesday’s SocGen Hedge Fund Watch that’s worth noting, especially given the ECB’s decision to hold rates steady earlier today:
From the latest SocGen Hedge Fund Watch, this is new:
Three Alphavillans are running around Canary Wharf in East London this evening in support of the British Heart Foundation.
Left to right: Lisa Pollack, David Keohane and Masa Serdarevic Read more
Five months in and it’s been a pretty good year for hedge funds with the HFRI fund weighted composite index up 4.4 per cent year to date, following its strongest first quarter performance since 2006. The index fell 5.25 per cent last year.
There was a small 0.36 per cent fall last month, but it’s unlikely to deter investors who have been scrambling to take advantage of the strong start to the year. Total hedge fund capital reached a dizzying record $2.13tn at the end of last quarter on a mix of performance and net inflows, according to Hedge Fund Research estimates. Read more