One in four lose some more

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

Pre-zombie update: slow, steady and hungry they march

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

Pre-zombie update

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.

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Zombie hordes thrive, await further hedge fund corpses

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

Pre-Zombie update

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

Can we finally lay to rest the idea that zombies justified their existence in 2008?

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

The world’s most successful hedge fund is not a hedge fund

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

The zombies have representation, and would like to respond

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

Sour sixteen, a pre-Zombie update

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

Smart enough to avoid a zombie bite?

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.

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Three things long/short hedge funds cannot do (well)

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.

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Two and twenty is long dead and buried

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

Zombies are the wrong kind of mean

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

Another walking dead update

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

A managed futures smackback to the Bloomberg takedown

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

Step one in zombie prevention: pants on

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 CNBCRead more

The great diversification bait and switch

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

Return of the living dead, hedge fund edition

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.

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