A reader thought we had overstated how bad things were in Hedgistan our post earlier this month, Public Pension Funds Starting to Abandon Hedge Funds….More Than a Decade Late, when we described a sea change underway. Readers may recall that CalPERS, often a trend-setter among public pension funds, had decided to end its hedge fund investment program in late 2014. Hedge funds had experienced a net withdrawal of funds in the fourth quarter of 2015, the first in four years. That was followed by an exodus of $15 billion the next quarter. Mind you, this took place against a background of pension funds, endowments, and other long-term investors committing even more funds to alternative investment as a result of inadequate returns in safer options, including making record investments in private equity.
Our reading was confirmed ten days later when the New York City pension system followed CalPERS in terminating its investments in hedge funds, citing “exorbitant fees” and underwhelming results. From Reuters:
“Hedges have underperformed, costing us millions,” New York City’s Public Advocate Letitia James told board members in prepared remarks. “Let them sell their summer homes and jets, and return those fees to their investors.”
Today, as recounted by the Financial Times, hedge fund kingpin David Loeb described in his first-quarter letter to investors how the hedge fund downdraft had only just started:
One of the most powerful US hedge fund managers believes that the industry is in “first innings of a washout” after a string of disastrous market calls inflicted steep losses on many funds…
The first quarter was “one of the most catastrophic periods of hedge fund performance that we can remember since the inception of this fund,” in December 1996, Mr Loeb said. “There is no doubt that we are in the first innings of a washout in hedge funds and certain strategies.”
Mr Loeb recounted a litany of recent woes for hedge funds. Many have been caught on the wrong side of market swings, such as those related to the Chinese economy and its currency, he pointed out.
Successful bets from 2015 on Facebook and Netflix have soured, and turns in the fortunes of Valeant and Allergan — two companies where hedge funds piled into their shares — “decimated” portfolios, Mr Loeb said…
Funds that had moved into market-neutral strategies at the end of last year were still running high-risk portfolios, Mr Loeb wrote, and when risk assets sold off this year, “market neutral became a hedge fund killing field.”
Event-driven fund management strategies such as Mr Loeb’s were among the hardest hit by outflows in the first quarter, with a net outflow of $8.3bn, according to HFR data. More than half of that was pulled from activist strategies.
It’s not just that the average performance has been poor, lagging the S&P 500. What has particularly hurt the industry is that many of the celebrated players who had the aura of being able to perform well in bad markets, or at least adequately, have stumbled, including Loeb, John Paulson, David Einhorn, and Bill Ackman.
We’ve also gotten reports of similar rending of garments at mid-tier players. A colleague met with a partner in an activist fund who he estimates is worth a minimum of $75 million. Not huge by hedge fund standards but not shabby either. He was angry because in his view, the hedge fund game was over, in part due to the growing investor revolt over fees, and in part due to the Fed making it impossible for hedge funds generally to do anything right (as in so many people are trying to second-guess the Fed’s every twitch that it’s virtually impossible to trade the market well even when you have decent fundamental takes).
So the sense of impending doom in hedge fund land is real. Of course, their version of disaster is having to pare back their house renovation or art collection or political influence plans because their future income is looking to be less rosy than they’d anticipated. But it still couldn’t happen to a nicer bunch. Hedge funds are ultimately arbitrageurs. Even the activists, which is a strategy that can claim to add real value by targeting badly run companies or dodgy reporting, often rattles cages and makes a quick killing rather than effecting lasting change.
While a certain amount of arbitrage is salutary to allow markets to function well, the level of resources committed to and rent extraction associated with hedge funds is completely out of whack with any social value (and in fairness, unlike the private equity industry, hedgies for the most part don’t pretend to be virtuous). So having them cut down to size would be a salutary development indeed.
13 comments
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This is the first time I’ve ever had this happen. I mangled a couple of names in the post (regular readers know I have name dyslexia on top of being generally typo-prone due to lousy typing skills; I was rushing to meet our 7 AM e-mail cutoff and so posted this unproofread, always a risky proposition). Even though I had corrected the errors less than 20 minutes after the post went live, readers were still complaining a full two hours after the revision, when it should not have been possible for them to access the older version, since I also had purged the cache. So the only solution was to copy the current version, throw out the one that had been up, and republish the later, corrected one. That meant all the comments got ditched too. I’m very sorry about that.
Very interesting Yves. I just accessed the old version from the feedproxy link in my email (8:50 am CDT). Should this even be possible if you have purged the cache and completely replaced the post?
I’ve copied the 6 existing comments and will put them in a separate comment so you can decide whether or not to publish them.
(I just received the new feed for this post in my email.)
These are the 6 comments that existed before Yves had to throw out the original post and replace it. I was able to access them through the feedproxy link in my email. (Copied at 8:50am CDT)
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Eduardo Quince
April 28, 2016 at 7:16 am
Dude’s name is Dan Loeb, not David.
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Yves Smith
April 28, 2016 at 7:20 am
Aargh, I do this all too often. I have a serious case of name dyslexia. I regularly mangle names when typing (oddly not verbally), and I up all night and rushing to get this done by our 7 AM daily e-mail cutoff, so I didn’t have time to proofread. Apologies. Fixed, thanks!
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craazyman
April 28, 2016 at 7:27 am
how can anybody live on only $75 million? Is that everything or is that the annual income? I hope it’s the annual income and I hope it’s after-tax.
But if it’s everything then wow, that’s “rent a studio in Queens above the auto-repair shop” money. That’s not Manhattan money. If that’s all you have, then you’re going to the Met or the MoMa to see art — you might even go to the Whitney if you live nearby and feel lazy — you’re not stumbling out of your master bedroom with a bad red wine hangover after a Friday night bang with a lap dancer staring up through blurred vision at your collection bought at Sotheby’s for ludicrously high prices that, to you, is mere walking around money. No way.
This is sad. To be so lost inside a wasteland of near-poverty, trying so hard when all odds are arrayed against you. You really do need a 10-bagger to be legitimate. And that’s before tax.
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Steve H.
April 28, 2016 at 7:31 am
– in part due to the Fed making it impossible for hedge funds generally to do anything right (as in so many people are trying to second-guess the Fed’s every twitch that it’s virtually impossible to trade the market well even when you have decent fundamental takes).
It seems to me that by minisculizing interest rates, the Fed has found the way to demand focus in a way that every movie star would envy. If margins are so tiny that random flutter overwhelms fundamental flows and tides, then observers are forced to read meaning into every twitch as though it were a slight curve in the mouth of the star on the big screen. Is that a sardonic smirk, or well-hidden lust?
And the only way to make serious cash is nothing productive, it’s hopping on the Fed’s downline to do stock buybacks and goose the market while making your bonus. And if you’re farther down the line, all you can do is hope your upline is right when they say the supply of free money will keep coming.
I’ve a friend with Parkinson’s, and there are times the tremors overwhelm his ability to walk. That’s the apparent causal chain for his stumbling. But we’ve talked about how Parkinson’s effect on dopamine has a deeper effect than appearance. Dopamine is not the reward, it’s triggered by the anticipation of the reward. So what goes is not just movement, it’s the motivation to move in the first place.
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Dino Reno
April 28, 2016 at 8:20 am
Hedge fundies complaining about the lack of fundamentals moving the market. Now that’s funny. They made concentrated bets on highly speculative investments that paid off big and then blew up. Fundamentals have nothing to do with it. The fact that pension funds got involved is like an upscale version of telephone scammers preying upon unsuspecting seniors. Me thinks the real reason they know the party if over is because the end of carried interest is nigh.
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Yves Smith
April 28, 2016 at 8:55 am
Even though this guy was complaining about fundamentals (as in reading the fundamentals and trying to anticipate what the Fed will do in response to them in terms of when to put on trades), the trading issues probably also extend to technical and algo-driven trading not working as well as it once did.
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it’s a gift to humanity! :-)
$75 million is play money. How much does a rocket cost, one that can take you to Mars for the weekend? That’s real money.
With only $75 million you’d have to decorate your Hamptons house to look like Mars and pretend. You could go to someplace in upper Canada and put on orange googles too. Either way it’s only a fake Mars.
Doesn’t that just make you burn with rage? Why should you have to settle for a fake Mars when the real thing is so close you can point to it? It’s outrageous. If you can get a ten-bagger that’s $750 million (before tax). Now you can at least start thinking seriously about hiring a group of NASA scientists. You can invite them over for a fake Mars party and start the team-building.
Aargh, this is really disturbing. It’s in Trash but not deleted permanently. I’ve just deleted it from there.
And we have a truncated feed, so you shouldn’t be able to get the entire post from that, only the title and the first para or so.
And that is all that I got in my feed. But the link to the article that is always at the bottom of the feed brought me to the old post here on the NC site. From what you say, perhaps the link found the post in your Trash. Weird.
Deleting from Trash must have worked because the link in the feed now gets the Page Not Found result.
I don’t think the name mangling is your fault. It think the FT is to blame. Yesterday Big Mo (El Erian) used the same misnomer (David Loeb) in a tweet about the same article.
Dyslexia is a well known symptom of genius—
http://www.nakedcapitalism.com/policies
– WARNING: The Internet is a hostile computing environment. Always copy your comment before pressing the Submit button. That way, if your comment does not appear for some reason, , you will not have lost it.
Thus:
– in part due to the Fed making it impossible for hedge funds generally to do anything right (as in so many people are trying to second-guess the Fed’s every twitch that it’s virtually impossible to trade the market well even when you have decent fundamental takes).
It seems to me that by minisculizing interest rates, the Fed has found the way to demand focus in a way that every movie star would envy. If margins are so tiny that random flutter overwhelms fundamental flows and tides, then observers are forced to read meaning into every twitch as though it were a slight curve in the mouth of the star on the big screen. Is that a sardonic smirk, or well-hidden lust?
And the only way to make serious cash is nothing productive, it’s hopping on the Fed’s downline to do stock buybacks and goose the market while making your bonus. And if you’re farther down the line, all you can do is hope your upline is right when they say the supply of free money will keep coming.
I’ve a friend with Parkinson’s, and there are times the tremors overwhelm his ability to walk. That’s the apparent causal chain for his stumbling. But we’ve talked about how Parkinson’s effect on dopamine has a deeper effect than appearance. Dopamine is not the reward, it’s triggered by the anticipation of the reward. So what goes is not just movement, it’s the motivation to move in the first place.
Thank you for being a sport, and I am sorry for the hassle.
I wonder if any commenters here have seen the godawful showtime show, Billions. While trying to emulate countless past david-vs-goliath stories, it not only whitewashes but valorizes hedgie titans, winking at the television audience that although they might cut corners, their aversion to risk and general intelligence is a welcome capitalist corrective to the “big government” of the US attny general.
Its an atrocious show, yet I’ve been hatewatching it just to see how low aaron ross sorkin (the capitalist load-bearer at the NYT) can go in his hypermasculine golden showering of the hedgies…
hmmm. Hedge funds and “quick killings”. Only works if there’s still something to kill; if the game haven’t been over hunted to the point of extinction.
On behalf of the Industry allow me to say that it wasn’t us who smoked all those whacked out derivatives, it’s the God damn Fed. And the other Central Banks. You know, as in the Banks. They’ve totally lost it and everybody knows it. They’re the freaks who can’t say no more partying, not us. And don’t get me going on those pension guys. They knew what the Fed was smokin’. Cripes, we all knew. And they’re into the ‘shrooms next from what I hear. No way those clowns can handle the ‘shrooms, and you people know it as well as I do. It’s going to be one awful mess to watch, folks. A bit of a rough Quarter? Ya, sure. But we’ve put that little squall behind us and corrected course and, soon as we confirm our information is good, we will be putting some of our deep money to work on some really exciting projects.
Flake Starling.