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.
… 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
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. 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.
Close to a tenth of all hedge funds tracked by HFR succumbed to the inevitable last year as 904 hedge funds liquidated.
Their historic performance will live on in the databases of hedge fund returns, but like more than two-thirds of all hedge funds that have ever existed, they are dead, defunct and arguing with their investors over valuations for those lingering illiquid assets.
To put that in perspective, half of all individual hedge funds have closed in the last five years. It is exactly what should be expected, given that the average life of a hedge fund which makes it past the 12 month mark is just over five years, but it is a salient fact that seems to escape the promotion of hedge funds as an asset class, a diversifier or a handy set of uncorrelated investment returns. Read more
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
Well done George Soros, who ended last year $5.5bn richer than he began it thanks to the performance of his Quantum Endowment Fund.
Each year LCH Investments tots the best hedge funds of all time as judged by actual dollar gains for their investors, after fees, and George is back in first place. Read more
When we pointed out that the hedge fund industry has been trounced over the last five years by the simplest combination of stock and bond index funds, we asked institutional investors a question: why are you invested in hedge funds?
The reason is that while there are very many people who are paid to sell hedge funds before they turn into zombies* — investment consultants, asset managers and banks — you seldom hear from the investors themselves. As Simon Lack likes to ask the old question: where are the customers’ yachts?
AIMA thought it had better provide an answer and so a letter from the hedgie trade body appeared in the FT on Friday. 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
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
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
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.