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Hedge Funds On The Defensive As Hugh Hendry Sees 80% Reduction In Size Of Industry
It is no longer fun being a hedge fund manager - first, up until the recent POMO-based rally in stocks, HFs were down for the year, and what is far worse, they were underperforming the broader market - a death sentence for pretty much every hedge fund, as this is proof a fund can not extract alpha and thus has no reason to collect 2 and 20. While the recent ramp in the market is welcome by all bulls, the question remains just how leveraged into the latest beta rally hedge funds have been. If after the nearly 10% rise in the past 2 weeks any individual HFs are still underperforming the market, it is a near certain "lights out." To everyone else: congratulations - you just bought yourself another 3 months of breathing room. Better hope the Fed makes good on its QE promises one day soon. In the meantime, Bloomberg Matthew Lynn and Ecclectica's Hugh Hendry both confirm that in these days of instantaneous liquidity demands, and cheap strategy replicators in the form of ETFs which provide the same beta capture as hedge funds, at a fraction of the price, it is only going to get worse and worse for the once high flying community. In fact, Hugh Hendry goes as far as suggesting that 10 years from now 80% of all hedge funds will be gone. Our personal view is that the target will be reached in a far shorter time frame.
On one hand, Matthew Lynn shows the uphill climb that defenders of the hedge fund industry have to pass in recent days. "An industry that doesn’t know how to defend itself, and has
forgotten how to justify its existence, is in crisis. Hedge
funds are now in that position." Hilariously, Lynn shows that hedge funds uses that good old staple used by HFTs to defend their own piracy ways and means: providing liquidity.
On both sides of the Atlantic, hedge funds have been busy trying to hold their own against the tide of fresh regulations sweeping through capital markets.
The Washington-based Managed Funds Association, the U.S. hedge-fund industry’s biggest trade group, has been campaigning against proposed curbs on high-frequency trading. That would, it says, reduce liquidity and increase costs for all investors.
Likewise, the London-based Alternative Investment Management Association is trying to hold the line against European Union regulations on short-selling. It claims selling shares you don’t own increases liquidity and aids price discovery, which means there should only be more transparency, not a clampdown.
Please, guys. This script just won’t work anymore. If you want to defend the industry, you need some new lines.
Can anyone seriously say investors are deterred from buying these stocks because the market in their shares isn’t liquid enough? Do we really need a lot of high-frequency hedge funds buying and selling their shares several times a minute to ensure there is a market in them? Of course not.
Likewise, short-selling. It’s perfectly legitimate in certain circumstances to short-sell a share. Occasionally, it will make the market a bit more efficient if there are more buyers than sellers. But again, none of the major markets is hard to trade. Nor are any of the big stocks really mispriced -- and, even if they were, it’s not much of a problem. If your sole contribution to humanity is that you help the share prices of large banks collapse over a morning rather than a whole day, it isn’t much of a justification for your existence.
Lynn summarizes what a credible, if improbable defense strategy may look like:
So, what the hedge-fund industry needs to do is start making a case that it is channeling funds to productive investment. It has to demonstrate that it is providing the capital that ultimately allows roads to get built, products designed, and jobs created. And it must show it is doing so in a more efficient way than banks and stockbrokers did 30 years ago.
How? If they were collecting money from the wealthy and investing it in industries or countries where capital is short, that would be a good argument. Or if they were creating markets in commodities or asset classes where none existed before, that would work. If they were smoothing out returns so people’s pensions were protected, or swapping currencies so they got cheaper mortgages, that would also make sense.
True, it may be impossible. The industry might well be a giant parasite that does nothing more than siphon vast wealth from the economy, while doing little in return.
But it should at least try. Just bleating about liquidity isn’t going to work. And if it can’t come up with a better way of justifying itself, it deserves to get hammered.
On the other hand, and making things even worse, you have a member of the hedge fund community itself, in the face of Hugh Hendry, who tells BBC that hedge funds "have reached a point where they've taken all the gains and it can only go the other way." And the most damning claim about hedge funds, and other asset managers in general: they are merely lucky (and in many case illegaly so) degenerate gamblers: "Overall it has been too easy to make money from financial speculation. I think that ease will disappear. I think that there are far too many hedge funds. I think the number of hedge funds could fall by a factor of 80% over the next 10 years. I think stock markets in 20 years time may be no higher than where they are today. House prices likewise. Try making money in that environment."
But lucky for hedge funds, they actually have a scapegoat for their underperformance in 2010 - High Frequency Trading. We fully expect that when the SEC completes its analyses of the May 6 flash crash in two weeks time, the blame for the crash will be squarely focused on the High Frequency Trading machine that has kidnapped markets. What happens next is anyone's guess.
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Hugh rocks Bitchez!
Edit: LMAO at this, "If your sole contribution to humanity is that you help the share prices of large banks collapse over a morning rather than a whole day, it isn’t much of a justification for your existence"
more on fed deficit #s
http://www.news.com.au/business/breaking-news/us-government-hiding-true-amount-of-debt/story-e6frfkur-1225926567256#ixzz106MjZzOz
Why does this one treasury bull with this goofy accent get so much accolades on this site ? Fair and balanced I guess.
Wait till gold gets tied to a currency some how, then these guys will get really bored.
what's the difference between a hedge hog and a hedge fund?
only one has lost his spine
They made the rope they were hanged with.
Full Hendry interview here - http://www.bbc.co.uk/iplayer/episode/b00tvsql/HARDtalk_Hugh_Hendry_CEO_Eclectica_Asset_Management/
Caveat - may only be available to UK residents.
I'm central USA and it says not available in your area. Usually I don't give a shit what anyone in Europe says about business, but I have to say Hugh Hendry would be one of the exceptions. Too bad for us.
You can't win 'em all, Ted K. Who knows, someday the people of the US will be lucky enough to have a taxpayer funded, socialist mouthpiece, media outlet such as the BBC.
In the US: http://www.youtube.com/watch?v=S_b9NmBMVWo
but available worldwide though any good VPN of course.
Blame it on the robots.
80% reduction! not sure whether i should be happy or sad about this news...
The Flash Crash is simply the case whereby actual stub trades put in by MMs to account for the regulation of having to make a market....were hit....hft or no hft....
Had these stub trades not been present.....what would have happened ?
The correction must be centered on the elimination of "MM stub trades"....
I don't think that it is hedge funds are now unable to provide alpha, as much as it is about government interference in the capital markets have made it nearly impossible for legitimate investment/trades/portfolio management to be as effective as they would be without the manipulation that's ongoing.
Sounds like an excuse to me. What happened to 'absolute returns' in all circumstances?
The best managers know which way the winds are blowing and move their sails accordingly.
Hugh Hendry ........ he's cool. I wonder what the world would be like if he ran the show ? My favorite quote is, "Don't pay. Don't pay them back. The banks have been involved in gross folly. Don't pay. "
If Hedge Funds are parasites, what are Funds-of-Funds?
I'm thinking of the nasty-ass raccoons that gorge themselves on blackberries then shit big piles in my backyard. But then I might be thinking about someone else.
yeppers time to seperate the men from the boys (women from the girlz)
I expect the same thing will happen in the VC market...the dot.com IPO boom is falling out of their reporting window. Without a lofty IPO market and a near 90% fail rate the math doesn't work
the hardcore will adapt their model and go on making money
rock on boyz and girlz
Oké... we blew it...
CTRL DEL USA
I suggest you panic.
lol
Look at Scary-mucci yesterday with the Prez....er....I run a $7.5 billion hedge fund and we are pretty PO'd at you for talking about raising our HF taxes....I can't even afford a bitch to get coffee for me... after all of the shit (you personally) have piled up, a $50k bitch will really cost me $90k and that be one expensive cup o java...
So, Antonio, you make a measly 10% and you guys make 300 hundred million for the year (2,20)and you have a fucking tin cup out ?
Come on, PSTFU..
Fee scams can only run so long. Those who actually make money will live. The other 80 % will be unemployed as they should be. Who is going to hire an unemployed hedge fund manger who screws clients? No one.
Hugh is cool but he's small fry in scheme of big money and he knows it. I think he actually enjoys that. That's why he can be "cool". Because he probably has zero institutional investors that would be shocked and offended by his statements.
Isn't that part of the problem- institutional investors who don't have a clue?
They're all thinking- "I've got to get my 8% annual to pay the obligations, get my bonus/performance fee and keep my state, local or union masters happy".
Here is what hedge funds have accomplished, they have scared small investors completely out of the markets. What has that done to the markets ability to raise IPO capital for SMEs? RIP
Small SMEs will look for financing in places like China, until the HFT parasites get their toehold there.
You can thank hedge funds for crippling a very important facet of capital formation in America.
HFT is a street hustle, nothing more nothing less.
Unless they payoff the right officials, China might cut their heads off.
If they can't short there is no price discovery of anything.
Game Over
You have HF managers bitching about taxes - goodbye 15% scam - but I did not see anyone complaining to the Prez that the $10 trillion stock market is being gutted by HFT firms and what the fuck is he going to do about it.. mmmm... sorry but did anyone else ?
My .02, QE2 is already priced in. Moral hazard works both ways. Failure to continue to administer ever-larger doses of heroin into the market will result in immediate withdrawal symptoms.
Hedge Funds are only as strong as the brains that power them. There have been an awful lot of 'pretenders' out there, throwing together funds on a whim and simply following trends. Hopefully whatever's left after the coming contraction will have proved their worth.
Full interview here:
http://www.youtube.com/watch?v=S_b9NmBMVWo
Thanks for such a great post and the review, I am totally impressed! Keep stuff like this coming!...
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