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A Cruel Summer for Hedge Funds?
Wall Street Journal senior writer Gregory Zuckerman was interviewed on Yahoo Tech Ticker saying it's a cruel summer and hedge funds are struggling too:
2010
has been filled with uncertainty and volatility; after some peaks and
valleys, stocks are just about where they started in January. Even
after a 10% gain in the last month, the Dow is only up about 2% year to
date.
That’s making it difficult for individuals and the pros
to make money. “It’s a tough summer,” says Wall Street Journal senior
writer Gregory Zuckerman. The lack of direction on the economy is
wrecking havoc on hedge fund strategies, he tells Henry in this clip.
Through
the first half of the year, hedge funds are only up about 1%. “They
can’t figure out right now a really good trade,” says the author of The Greatest Trade Ever.
Hedge fund manager Philip Falcone is a prime example. After a 46%
gain last year and a 116% return in 2007, his Harbinger Funds are
suffering as of late. “As of July 15, Falcone's Harbinger Capital
Partners Offshore Fund I was down 10.7 percent, ranking the New
York-based fund manager one of the industry's 20 worst performers,
according to HSBC,” Reuters reports.
It’s times like these that have many investors waiting it out on the sidelines.
Ironically,
one of the most bullish managers around is John Paulson, the man made
famous for making billions by betting on the housing collapse. He owns
large stakes in banks such as Bank of America and Citigroup, and has
told investors he expects the real estate market to bounce back 3-5% in
2010 and 8-12% in 2011. (Update: Recent market volatility has
prompted Paulson to rein in his horns a bit. The $3 billion Paulson
& Co. Recovery fund, launched in 2008, has decreased its net
exposure from 140% to 107% in recent weeks, The FT reports, citing a letter from Paulson to clients.)
Meanwhile, as mentioned in a previous segment,
other hedge fund giants are betting on deflation. David Tepper, who
raked in $4 billion in 2009 by getting bullish at the bottom of the
market, is not as sanguine about stocks. He has a large position in
high-yield debt.
So what's going on with hedge funds? Tyler Durden of Zero Hedge posted an interesting comment on the impact of the liquidity crisis on the hedge fund industry, citing a report from Citi Perspectives (click here to view report). Tyler ended on this note:
Yet this pearl takes the cake, as it basically confirms that for the longest time the entire industry was a Ponzi scheme:
“There
were accepted practices going on in the industry up until 2008 that in
retrospect look like a problem. Funds were using the liquidity of
incoming investors to pay out the established investors without testing
the investments themselves. It was hard to see this until everyone hit
the exit at once and everyone starting asking for their money back at
the same time.”– Fund of Fund & Seeder
Clearly
there was a 'Ponziesque mania' that surrounded hedge funds and other
alternative investments, and global pension funds share a lot of the
responsibility as they bought into the mania at the top of the market.
But
there is something else going on with hedge funds. Post-crisis, a lot
of them have not adapted, and are not able to deal with the structural
changes impacting their industry. The top hedge funds have adapted, but
most are struggling in the new environment where investors demand a
liquidity premium and a lot more transparency on the risks being taken.
It's
quite amazing that the 2 & 20 model still persists, but with
pensions suffering record shortfalls, few are muscling hedge funds on
fees. Not that I think they should. What pensions need is to start
leveraging off all their external managers. They need to view external
managers as a valuable source of ideas, and build on these ideas through
internal strategies to add value to overall returns. (Easier said then
done. To do this properly, you need excellent relationships and internal
expertise to properly implement ideas).
And in terms of investments, the easy money was made in 2009, but now
that the big beta boost is over, the wheat will get separated from the
chaff. I happen to disagree with both John Paulson and David Tepper. The
rally in equities will go on as long as the Fed is allowing banks to
borrow cheaply and invest in risk assets all around the world.
But there are
important structural forces weighing down long-term economic growth.
From high unemployment to demographics, it's hard to see a significant
pickup in inflation expectations anytime soon. Inflationary
forces are still fighting deflationary forces, and with no clear winner,
markets could be range-bound for a long period.
There is a
caveat to all this. Watch what is going on in emerging markets because
if they start exporting inflation, it could be a structural shift that
leads to global stagflation. In fact, Reuters reports that a food price crisis may be the next stumbling block for emerging economies, even as their bonds and stock markets rally in relief at an easing of the eurozone's debt crisis.
So
why are hedge funds still struggling? There is no shortage of themes
to play. From traditional energy, to renewable energy, to agribusiness,
to commodities, to technology, to medical devices, all the way to
nanotechnology.
But the reality is that a lot of
managers remain very apprehensive, unwilling to commit significantly to
any sector until they see clear signs that the economy is stabilizing
and the forces of deflation/ deleveraging have subsided.
In the
meantime, the liquidity rally continues and smart money is buying the
dips. How long will this go on? As long as the Fed allows banks to
borrow cheaply and invest in risk assets all around the world. There
will be hiccups along the way, but nothing resembling 2008.
Below,
I leave you with Gregory Zuckerman's interview as well as an interview
with David Gerstenhaber of Argonaut Capital Management. I don't agree
with all of Mr. Gerstenhaber's points, but listen to his thoughts on why
businesses are not hiring and investing and why he thinks the main risk
remains deflation.
»
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Sorry Leo I can't resist this .
il.youtube.com/watch?v=3fdEKMCHvtQ&feature=related
Not as glamourous as your average victoria secret girl but you would not kick them out of bed in a hurry either at least not back then.
playing shorts? I guess that might work if you're smart in picking the right sectors. Personally I don't enjoy competing against HFT's.
I am crying big, wet, crocodile tears for all those poor 20-30 year old prop traders who couldn't trade their way out a wet paper bag.
Last I read, the Fed's charter, in total was full employment consistent with price stability.
Who needs jobs when we have a rising market?
The whole bunch of incompetent Madoff wanna-be dipshits can die choking in a stale beer fart for all I care.
... the DOW broke 10.000 in 1999 ... that's 11 years ago ... now that's a real sidwinder
Interesting SP500 chart ...
http://stockmarket618.wordpress.com
Hedge funds = rentiers and parasites. Good riddance.
"In the meantime, the liquidity rally continues and smart money is buying the dips. How long will this go on? As long as the Fed allows banks to borrow cheaply and invest in risk assets all around the world."
Yeah, buying overpriced assets on leverage ALWAYS ends well, and the virtuous upward spiral in prices always proceeds uninterrupted. Bernanke had his hand mashed down on the "MORE CREDIT" button, begging the banks to borrow money at zero and invest it in anything, and it still didn't arrest the credit implosion from continuing to the (temporary) capitulatory bottom in early 2009.
If you are right that the Fed can engineer an intermediate term asset price rally by offering cheap borrowing, then all that will accomplish is to pump up an even bigger Ponzi yield-chasing asset bubble, which will implode with even greater and more unstoppable momentum than what we witnessed in 2008/2009 (if it doesn't spiral into a final hyperinflationary crackup). You'll be sure to warn us before that day comes, right Leo?
Bernie et al have no choice but to work their white asses off trying to re-inflate the balloon. They've got boomers ready to start relying on IRAs wh/ are only as valuable as the rigged market is in the green. Our society is one stinking helium balloon that wants to pop and drop. What are you gonna tell the suburban couple down the street who assume 2 cars, a jeep, a few 4X4's and long weekends away from their 4 bedroom home is the American dream? That they have to carpool and go fishing at the local reservoir with the kids on weekends? Won't happen.
I did warn people back in 2006 and it cost me my job. -)
What warnings signs are you looking for this time? Are you buying every dip until the Fed raises short-term rates?
At the time I did research on the securitization bubble which led to the world of CDOs-squared and CDOs-cubed. I knew we were cooked, and when those Bear Stearns hedge funds imploded, I remember telling myself: "here we go....this is it...the catalyst". But this time around, there are no strong arguments for a long bull or bear market. You have to pick your spots carefully, and going forward, it's going to be a lot harder making money.
I like to think of it as a market going nowhere fast. I'm a small individual investor and the only strategy I've made money on in the last 12 months is selling covered puts and calls. I cover the puts with cash. I've made a 19% annualized return on assets (no leverage).
As for my real estate investments, that's a different story. Still, if you're going to do anything for the long run, do a little bit of everything. And when you see 2/20, run like hell the other way.
Because most of the hedge funds that are actually making a profit understand cash is king and playing shorts is pretty much the way to go for the next while.
We are all doomed