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Hedge Funds Have Failed To Participate In Equity Rally
As the market continues on its steady path to the stratosphere, first it became apparent that pension funds did not participate in the run up due to their significant reduction in equity exposure around the March max pain. What might come as more of a surprise is that according to the HFRX Global Hedge Fund Index (HFRXGL), even hedge funds are broadly underperforming the rally. Which is why aside from various Reuters articles claiming the contrary, hedge funds are mostly on their toes regarding their staffing decisions, as many funds are dealing with disgruntled investors who are confused why they are paying 2 and 20 for levered positions in equities when they could have generated better returns outright.
A comparison of the S&P500 with the HFRXEGL indicates that not only have hedge funds (up 8.7% YTD) failed to beat the broader market (13.5%), but the inverse gap currently is at the year's wides.
The reason for this is well known: prevalent skepticism over the actual economy, together with a disbelief in a computer and HFT driven rally (hedge funds tend to see beyond the volume of 5 financial stocks accounting for 40% of the NYSE volume), resulted in a negative turn in the February-April time frame, with either significant exposure reductions or outright deployment of new shorts.
Hedge Funds are thus faced with the triple whammy of deplorable returns in 2008, an insurmountable high water mark, and a failure to participate in the most orchestrated rally since the great depression. Furthermore, performance statistics indicate that fewer than 10% of hedge funds have recovered their losses from 2008/early 2009. So when you see Reuters articles about hedge funds hiring, take them with a big grain of salt.
h/t Gunther
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More like a pound of salt
I think reuters (could be NYT, my memory fades) picked up on several financial names compromising the majority of volume story.
They pay more attention to ZH than they would like to admit.
ECB monthly bulletin August 2009 P44 Chart B
Households in Europe did not either,then who did
participate in the rallye of better than expected?
Pavlov ?
retail and goldman
you know what this means - more upside as those underperformers will start investing again
Bingo! Hege funds have become the dumb money in the market. When they start buying en mass THEN it's time to sell and go short.
I see just the opposite. I see the hedge funds selling this market down into the end of the year. Even if they jumped onto this rally at this point, they would still lag.
But if they could engineer a drop, the market would come back to them. So much easier to trip up the competition then to out run them.
Not if the competition is GS! The ones that will outperform will tread GS path, and those who cross it will get slaughtered - either long or short.
When it's in the interest of Goldman Sachs for the market to drop, the market will drop.
Color me skeptical, but I just don't believe in the omnipotence of the three card monte crew better known as Goldman Sachs.
I imagine the folks inside were getting pretty nervous last year with their stock below 50, down ~80% from its peak.
The more people fear these crooks as some sort of super-human juggernaut, the less people can see them for who they truly are--crooks.
cognitive...bingo!
Performance anxiety that could lead to a lot of pension/hedge funds chasing the market up? Or perhaps any pullback will be met with heavy buying as these funds try to average into equities? Who knows, but surely something to watch for.
Any fund who can short has not done well, it makes sense that they dont do well because its their mandate to hedge. During booms, mutual funds outperform and vice versa when the markets tank. Its no secret TD. But I do think the tides will turn in favor of the hedgies once the wildebeast heard has finished their migration.
Using the HFRXEH (Description below) tells a similar story. YTD it is up 9.49% v. SPX up 13.54% and since Mar 9th it is up 12.37% v. SPX up 51.59%.
DESCRIPTION of HFRXEH:
Equity Hedge strategies maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios. Equity Hedgemanagers would typically maintain at least 50%, and may in some cases be substantially entirely invested in equities, both long and short.
Who is participating in this rally? I've seen hedge funds underperforming, pension funds reducing equity exposures, individual investors not jumping in. Seriously, who is making all the money right now?
who else? Goldman Sax
Your Master you measly debt slave!!
Question for the assembly: Is it reasonable to expect this stock rally to be maintained through year-end?
DOW was at 9034 on 2 January 2009. S&P was at 931.80. There are federal and state tax revenue implications associated with these levels. Obviously, higher levels at year-end result in taxable cap gains distributions from mutual funds etc, while lower levels result in taxable losses / write offs.
I don't think so. I think we will get a crash by end of 2009. There is simply too much going on (Af-pak is deteriorating, HHS is promising a flu pandemic, Iraq and Syria recalling ambassadors, BRIC setting up bilateral currency swaps , DPJ might win the elections and issue sepukku bonds, etc)
Please explain the Syria/Iraq thing. I've must of missed that in the news.
http://www.cnn.com/2009/WORLD/meast/08/25/iraq.bombing.syria/
Got to laugh at the Reuters headline Obama on brink of middle east peace talks breakthrough as Syria coddles up to Iran and iraq accuses them of orchestrating the bombing from thier soil. The US ops in Afghan get less and less traction even in the MSM - Mehsud dies...
I think it will last at least into Jan/Feb next year. That is when the Fed is supposed to stop buying MBS. Remember they need to print $500B of new money through the end of the year for that program alone.
Oh, look, Fannie sold some debt, wonder where the money came from for that?
Operation Date: 08/21/2009 Operation Type: Outright Agency Coupon Purchase Release Time: 10:30 AM Close Time: 11:00 AM Settlement Date: 08/24/2009 Total Par Amt Accepted (mlns) : $5,605 Total Par Amt Submitted (mlns) : $11,209My gut feeling for this whole year has been a little shorter than consensus. I don't think that they will be able to hold it together once the soybean and corn harvest kicks in. There is a lot of money that exits the stock market and goes to the real world then, which will drop stock market demand. Also, it is something that can't be fudged. Either you have grain and can eat, or you don't. This is starting to show up in India as they are talking about not allowing exports again this year to lower pricing pressures (I think that info came from nogger.blogspot.com).
Another squeeze on these grains is the current push to make bio-fuels. Soybeans are used for bio-diesel and corn for ethanol. There have been many plants comming on line in the last few years, so expect a larger demand from this sector.
The final piece to the puzzle is the population growth to farmland ratio. We just keep getting more people, and there hasn't been an appreciable increase in land that is farmed above sustanance levels. This is also riding on the back of a slowing growth rate.
I have a feeling that harvest is going to just plain suck this year with El Nino starting up again. Nothing like waiting a month to harvest your corn, because the fields are to muddy, to drive up prices.
I live in Greenwich and outside of Shumway Capital I don't see a single hedge fund doing well. Tudor Jones is doing ok, up in the single digits, but the rest pretty much suck. Lock downs and closures rampant and should accelerate. End of the era. Enjoy those Bentleys while you still can.....
Ah, Greenwich, I wonder how Malcolm Pray's businesses are doing there, he still selling cars to the stars?
I think Leo's post earlier made a lot of sense - there is a big premium on liquidity these days. Just about everyone I talk to knows this rally is bullshit, it is pure liquidity driven, and once the liquidity stops flowing, there is some pain ahead. So no one wants to be locked into a 3 year lock up when we could see 10% declines in three days.
A natural consequence of a fiat currency, IMHO, the frequency and severity of bubbles increases. You have to be extremely nimble in this market, locking money up in a hedge fund is dangerous.
this is purely anecdotal and maybe other ZH members could add...but every l/s equity fund I know (through friends) are doing well this year. On average they seemed to be down 12-15% last year so it would make sense that they lag the rally at least a bit. Maybe HFR is useless as there has been so many fund closures. I know in my category (MBS) there has been a ton of turnover making their index useless as a comp. Additionally, I now get a call from them a couple days after months end for performance. I assume the urgency is the decline in assets and participants. Again...this is just my observations.
I tell ya, all that $$ sitting on the sidelines is gonna come rushing back in. Here it comes right now. Wait, let's try that again, here it comes right now all that money on the sidelines. Now. Right.....NOW! CNBS - continue parading your moronic analysts please, by the time this is over we will have whittled down credible resources to ZH and a handful of others.
thanks for explain and ad more commentaries
Yup, they are chasing the indexes higher and they keep buying the dips. Read my previous comment on this, big money suffering performance anxiety.
The question now becomes how long can this last? A lot longer than you think. The Fed has pumped tons of liquidity in the system and all that liquidity will lead to another bubble in some sector or asset class. But the overall markets are still too heavily weighted in financials, which worries me.
Bottom line: Going into year-end, big money will keep buying the dips, and things can go exponential very easily as liquidity feeds another bubble. But be careful, stay vigilant, and stay very nimble.
I agree 100% with your thesis - no different than 1999, see my post below. I remember at the time speaking to some friends who were money managers, and they admitted they avoided tech stocks at the ridiculous valuations even in 1998, until their investors started screaming about their performance, and there were forced to rush in. The "chasing performance" market lasted until Greenspan started sopping up some of that Y2K cash.
I agree. I've been watching CMBX
closely and consider the potential for
sideline money to come in as increasing
the longer the rally is sustained:
http://debtsofanation.blogspot.com/2009/08/debts-of-spenders-from-reits-...
I agree - been watching the CMBX for a while now and it's showing signs of stabilization (if not improvement).
http://debtsofanation.blogspot.com/2009/08/debts-of-spenders-from-reits-with-love.html
I don't see any liquidity, I see highly leveraged hot money pushing around thin summer markets.
Title: M2 Money Stock
Source: Board of Governors of the Federal Reserve System
2009-03-01 8335.0
2009-04-01 8281.8
2009-05-01 8345.0
2009-06-01 8370.1
2009-07-01 8347.8
Real liquidity, M2, has been stagnated for half a year. Actually contracted last month.
Same money supply, different distribution. Consumers have less, financial participants have more.
Hey there Leo,
I disagree with you on only one point - that 'big money' buys dips.
It doesn't. Like all chasers, they buy highs (and sell lows).
Part of it is not their fault - they respond to fund redemptions and inflows. An equity manager should be 100% invested (because he should assume that the asset-allocation decision between investment categories was made BEFORE he was given the client's money).
So if your client invests like a nuffnuff (panicking out at big-volume lows and jumping back in at big-volume highs) you're duty bound to put that dough to work. (Unless you have a mandate that permits hedging - in which case you can get yourself some cover at points that look like highs).
Fact is, there are a load of 50-somethings around the western world who face a retirement where their food comes in tins with pictures of pets on it (the average 50-something has roughly 4 months of income as savings [net of home equity - ha ha]... that's not funding 30 years in Florida or Queensland). So they are very twitchy at lows and ebullient at highs. Meanwhile, GenX and GenY are eschewing (for the most part) stocks, and by the time they're 40 both demographics will probably wind up behaving like Japanese pensioners.
Cheerio
GT
GT's Market Rant
Recover losses from 2008? Are you crazy? We are FORWARD looking.
This is no different than 1999 - anyone trading based on fundamentals misses a liquidity driven rally. What was the P/E of the S&P at its peak in 2000? Lots of Y2K cash floating around those days. No different today.
"HSN" is a better function for depicting this.
and if they have done that poorly, investors will pull money and more liquidation will occur
Anyone bothers to compare HF returns & SPX returns on a risk adjusted basis? I thought the aim of an equity L/S fund is to capture 2/3+ of the upside and <1/3 of the downside?
couple of things to keep in mind
the term "hedge fund" covers so many vastly different strategies that it's almost useless to talk about the broad category for a comparison. what hedge funds? the net neutral equity, the net shorts, the long/short but long biased, the global macro, the event funds, etc, etc. they have such different strategies.
also, breaking news, hedge funds should be "hedged"...so they typically don't rise as much in up markets and don't fall as much in down markets. that is their PURPOSE...hedging.
contrary to popular opinion, hedge funds probably shouldn't beat the market in up AND down markets. what should matter is the total return net of fees over a complete market cycle including BOTH bear and bull markets. look at it that way and if, after fees, you are ahead of "the market" then that's what matters.
If a hedge fund was down net after fees 20% in 2008 and up net after fees 10% in 2009 then i'm down net 12% total. If the market was down 40% in 2008 and up 20% in 2009, the market is down net 28%. Rather be in the hedge fuend in that case...even after fees.
and i didn't even touch on risk-adjusted returns. who cares if i slightly beat the market when it's up if took twice as much risk to get than extra return.
it's all about risk-adjusted return over a complete market cycle (bull and bear markets).
taking a short time period of only rising indexes to make a complete judgement isn't wise.
Don't get me wrong, i do know there are funds that promise to beat the market when it's up and be flat or lose less when it's down and they don't deliver. that is more about setting bad expectations. but an investor should read that crap a mile away and walk if someone says they have a technique to beat the market up and down with no risk to capital. bullshit.
just my 2 cents.
Anyone bothers to compare HF returns with SPX returns on a risk adjusted basis?
Besides a few exceptions like John Paulson, David Einhorn etc., the current crop of big money is the most clueless, spineless, intellectually deprived lot in human history.
¿Paulson has a clue? Last I checked he was buying up Bofa!!!
Also buying all the gold stocks he can get (even if you believe in inflation gold firms are richly priced and they all use futures to lock in the price of gold - limited upside from gold going up or down). What is he thinking? Richly priced stocks that cannot benefit either up or down on the underlying commodity?
@ #48780... EXACTLY, amigo.
As I mentioned in "Falling Markets Make Baby Jeebus Cry" (back in late 2008) most of these supposed 'hedge funds' are not hedged in the slightest. They are leveraged stock punters... and they behave like Dumb Money at Work; they invariably blow up at turning points. So they will be the last schlubs on the boat at the swing high (they have even perverted the Dumb Bull Ratio that I construct from the CoT, which is no longer as good a guide for nuffnuff behaviour - for the sole reason that so many 'hedge' funds trade in size, but they still trade like the dumbest-assed non-reportables).
Cases in point:
(1) the dills who had to liquidate massive short 30yr Treasury positions above 130 (apparently having shorted below 113)... coverd at massive losses all the way up to 142, as every seller got out of the way.
(2) the dills who had to liquidate short CL futures at above 135, having sold the spike down after the failure at 100.
And so on and so forth.
Access to cheap credit enables any manager to goose returns, and after one good month you buy your Maserati and hire a PR manager to pitch you to Bloomberg or CNBC... whereupon your FUM grows fast, and you overpay for a Hamptons summer rental.
It got to the stage where even guys who were doing convertible arb were leveraging themselves up to their balls... and using standard Black-Scholes (with its stupid assumptions of continuity, homoskedasticisty and absence of gaps) to try to figure out the price of the embedde option. Fucking douches.
Anyhow... today's been a very high-quality day on ZH - keep sticking it to 'em.
Cheerio
GT
GT's Market Rant
good stuff GT, i didn't even mention leverage in my rant. correct, many "hedge fund" PMs are nothing more than mo monkeys...but not all of them. some are true stock pickers that do deep fundamental work and add value. they are the exception, not the rule, unfortunately.
i actually met with a hedge fund pm that tried to explain his strategy and it was such bullcrap about buying and selling spx calls and "scalping" greeks and doing it with little risk. i've been in the equity analyst/portfolio manager business 12 years now and if a strategy can't be understood in a 5-10 minute conversation, then it's probably a load of crap.
That's true, #49386 (that not all hedgies are momo-morons); I've got quite a few mates who run Tactical Asset Allocation trusts and other large-ish fund mandates, and they really do think hard about stuff.
You're also spot on when you say that anything that can't be explained in 5-10 mins is crap... my mentor (Peter 'Dicko' Dixon - who in turn was a student of Vasilly Leontief at Harvard) was fond of saying that if a thing can't be explained without the use of a semi-colon, then it should be thrown out.
Dicko's dynamic CGE models have millions upon millions of behavioural equations, but each of them comes down to optimising behaviour by agents - the investment problem, the producer problem, the consumer problem and some discussion of constrained subsitution in production (input and output) and consumption.
As "His Dicko-ness" once remarked (saying that the core principles of economics should take a bright kid six weeks to learn - thereafter he learns embroidery)... "All economic interaction is very simple - there's just a lot of it".
Cheers
GT
Actually I short-changed myself (regarding when I first mentioned the fact that an awful lot of hedge funds do not hedge). I'd mentioned a post from late 2008, about the time when the thing gained traction in public consciousness.
I was reminded by an observant (and archive-fanatic) reader that the first time I wrote about it was in 2006, on June 15th, in "USRant: A Day Late… But Dere He Is, Da Guy"; the salient paragraph was
Cheerio
GT
GT's Market Rant