Facing Extinction, Hedge Funds Go All In: Take Net Assets To All Time High, Cash To Record Low

Tyler Durden's picture

Several years ago we said that in the New centrally-planned normal, in which the Fed chairmanwoman is the Chief Risk Officer of the s0-called market, and where no selloffs are allowed because any major drop in a market artificially supported by trillions in artificial liquidity, would probably be its last (as it would crush the "credibility" of all-in central banks) that old "smartest money" concept, the 2 and 20 hedge fund, has become an anachronistic relic of the past (especially once Stevie Cohen ruined the game for everyone and took legal insider trading aka "expert network" out of the picture and forced hedge funds to make money the old fashioned way - legally).

Now, for the first time, we have empirical proof that hedge funds are indeed on the verge of extinction courtesy of the New artificial Normal. In its hedge fund quarterly note (which it clearly ripped off from Goldman), Bank of America has concluded what we said in the beginning of the decade: "Hedge Funds are less attractive post the financial crisis with lower alpha and less diversification benefits." Or, in other words, hedge funds (for the most part: this excludes those extortionists also known as activists who successfully bully management teams into levering up in order to buyback record amounts of stock, in the process burying their companies and employers when the next downturn arrives) no longer provide a service commensurate to their astronomical fees. Or any service, for that matter, that one couldn't get by simply buying the S&P500.

Here is the tombstone for hedge funds, from Bank of America, in two paragraphs:

Since the financial crisis, Hedge funds have generated positive alpha of 0.0999%, which is lower than the 0.7922% of positive alpha generated before the financial crisis. Additionally, hedge funds are more exposed to market risks than before the financial crisis. Since 2009 the CAPM model has explained 75% of HF returns, but pre-financial crisis CAPM explained only 2.96% of returns. In summary, although hedge funds still offer positive risk adjusted returns, the investment is becoming less attractive as an asset class due to the lower alpha and less diversification benefits.



Equity L/S strategy has a negative alpha of -0.0993% since the financial crisis, compared to a positive alpha of 0.9353% before financial crisis. Moreover, Market risk premium and market exposure explains 81% of HF performance, compared to 42% before the financial crisis (bottom charts)

The two paragraphs above are indeed the death knell of the hedge fund world, and for those who don't get it, here it is in plain English - hedge funds no longer generate alpha, they merely trade on (levered) beta. As a result, investors in hedge funds have virtually none of the market upside, all of the downside, and are far more exposed to drawdowns and volatility (assuming there is any). In short - in a market in which crashes are no longer allowed, hedge funds provide zero value and furthermore, since many of them are short the same hedge fund hotel stocks which blow up in everyone's face once there is a short covering panic, most hedge funds end up underperforming the market year after year, for each consecutive year since the financial crisis.

Of course, nobody excepts hedge funds to just curl up in a ball and die. And they won't, at least not without a fight - PMs are just too used to making hundreds of millions in performance fees each year to retire to that ranch in Montana just yet.

So what are hedge funds to do? Why go all in of course.

As Bank of America also reports, "based on the quarterly 13F filings and estimated short positions of the equity holdings of 912 funds, we estimate that hedge funds increased net exposure to $646bn notional at the beginning of 2Q 2014, up from a record high of $617bn at the end of 2013. Percentage-wise, net exposure remains at 71%, the same as at the beginning of 2014. Net exposure fell further to 61% after subtracting ETF shorts, down from 63% at the beginning of 2014. Cash holdings remain at a record low 3.6%.

Hedge funds raised gross exposure to $1700bn notional in 1Q, a 6.3% quarter-on-quarter increase. Percentage-wise, gross exposure stands at 186%. When including ETF positions, the gross exposure increases to 203%, compared to the 2007 peak of 207%.

Finally, Bank of America admits that its analysis does "not include derivatives, which are potentially a larger source of exposure and leverage." This is something we covered back in April when we explained who are "The Most Levered Hedge Funds" showing how off the books leverage can make a $15 billion AUM hedge fund like Citadel manage $142 billion in "regulatory" assets.

And now, since chasing (or as it is jovially known "seeking") alpha is no longer possible, let's all lever up on beta and pray to the Hon Yellen that nothing bad ever happens again.

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FieldingMellish's picture

Time to die, bitchez. I won't be crying at your funeral.

mjcOH1's picture

"Facing Extinction, Hedge Funds Go All In: Take Net Assets To All Time High, Cash To Record Low"

When others are fearful, be greedy.
When others are greedy, be fearful.

kliguy38's picture

NO SHIT!!  don't forget to look in a mirror.... we're all on this train one way or another....and when it goes over the edge its takin' ALL of us with it

mvsjcl's picture

All hedge funds are doing is following orders. If they're all doing the same thing then they're following the same instructions. And why not. After all, it isn't their money. They got theirs already.

cifo's picture

Extinction? No more SAC, no more Soros Fund?

aVileRat's picture

Lots of beta chasers who never should have left the sell side sales desks will be chewed up. Unless ETF's start seeding new ventures and facilitating deals, the institutional investment manager is alot like Dr.Who. You think he's dead but he will just regenerate into a new (slightly more batshit insane) manager, in the same old LP/GP/GP structure. Hell, the same recycled plots come up every few years or so (new utility company will save the world, wunderkid with a new toy etc etc)

Same thing happened in 1903, 1965, 1987 and 1999.

Circle of life.

thisisjustarandomusernameicreatedforzerohedge's picture

net expose and cash stayed the same.... how is that taking exposure and cash to record levels?

only thing changed was increase in notional... which just means investors are adding principle... but the hedge funds haven't changed their strategy YTD..

Occident Mortal's picture

Excuse me,


But the linear translator of the trendline of these charts does NOT equal Alpha. Don't believe the mathematics of banks. These guys are fucking idiots.


Hedge funds only have positive Alpha when Y > X.

Y= hedge fund returns

X = market returns above the risk free rate


As you can see before the financial crisis...

Y = 0.0587X + 0.7922 

Y is only greater than X when... X < 0.85 

Ergo, before the crisis hedgefunds only generated alpha when market returns were less than IRR + 0.85% (which was very rare).


Following the financial crisis...

Y = 0.3254X + 0.0999

Y is only greater than X when... X < 0.13

Ergo, after the crisis hedgefunds only generate alpha when market returns are less than IRR + 0.13% (which hasn't even happened yet).


The S&P historically generates returns of IRR + 4.00%


Hedge funds ALWAYS ALWAYS ALWAYS underperform a rising market (markets rise 73% of the time). That is the cost of hedging.


People who invest in Hedge Funds on the expectation of outperforming the market are FUCKING MORONIC HEIRS.

max2205's picture

ZH is reading like.a horror story tonight.....


Will the sun come up in the morning?

I Write Code's picture

It sounds like the hedge fund guys don't even know what hit them.

TheRideNeverEnds's picture

smart move, everyone in the pool the water is fine, don't wanna miss the next five years of this bull market.

Caviar Emptor's picture

Simply put: in a rigged casino, hedging loses money. Put all your money on the pass line because ther is no chance to win any other way. And btw: investing in productive enterprise is soooo 1990s. No point gambling on a startup or entremanureship when you win every time you bet on seven . You'd have to be a fool

Seasmoke's picture

Timber !!!!!! You can just feel it , in your bones.

mt paul's picture

easy as catching

baby spotted owls

as they fall 

out of the tree...

RiskyBidness's picture

yellen glory hole will be sure to get the market UP tomorrow.  Let the party start!!

DirkDiggler11's picture

Let me see if I get this straight, just looking at current events from today :

Russian Nat Gas pipeline, one of their largest, in Ukraine suddenly spontaneously combusts. That whole situation growing worse by the day.

Iraqi prime minister goes full regard, spews hate towards everyone, while another bunch of angry Muslims closes in on Bagdad, putting even more oil production in jeopardy.

Argentina gets it up the ass from the US Supreme Court, putting yet another country into an economic tailspin. Hedge funds win, everyone in Argentina loses.

Chineese still searching port warehouses looking for invisible supplies of copper and iron ore as more safety nets installed around more Chinese bank buildings.

All of this shit, none of which is trivial in nature happening around the globe and the US Markets finish higher on the day ? If this doesn't tell you the fed is the only game in town right now I don't know what the fuck will.

kareninca's picture

The Fed isn't the only game in town.  There are other central banks, too.

Bioscale's picture

The FED is a private banks' cartel, Goldmans and Morgans are also probably the real "owners" of the others central banks. They just call it central bank independence.

thisisjustarandomusernameicreatedforzerohedge's picture

because most of that shit doesn't have any affected on silicon valley or housing the two things propping up the main indices

GreaterFool1965's picture

This is a function of record high correlations across asset classes...

Colonel Klink's picture

Die hedge funds, DIE!  I look forward to seeing the former rich jumping from buildings.  History will rhyme once again.

scraping_by's picture

Let's see: hedge funds run by the experts are buying in at the top of the market. Which is supposed to be the hallmark of dumb retail.

Well, they still get thier management fees. And transaction fees. And redemption fees. And...

Caviar Emptor's picture

No they're smart! They realize that all the newly printed money of the world will end up in the market whole hog long margined, levered and re-hypothecated. And NONE will end up in the real economy! Why? Lol only a moron would gamble on a real business when you can win every day and never lose betting on lil pieces of paper

Kaiser Sousa's picture

"thats why im richer than you..."

GrinandBearit's picture

When others are greedy, be fearful.

When others are greedy, be fearful.

When others are greedy, be fearful.


babylon15's picture

Warren Buffett has negative alpha since the financial crisis also.


Warren Buffett did not have inside information - do some research.  If you had replicated Berkshire Hathaway's 13Fs 45 days after they were filed (public disclosure delay), you would have earned the same 20%+ annual returns he did since 1976.  So, by definition, he did not have inside information.  He literally predicted the future.  We may envy his money, and his success, and his luck in being alive to do this before many of us.  But don't call it insider trading.


The fact that Warren Buffett and hedge funds are on the same side of the ship suggests they have overlapping strategies and positions.  In my book, they are both good guys.  Honest, hardworking fundamental investors doing research and betting against efficient markets.  The bad guys are the central banks, printing money and forcing pension and insurance funds to invest in risk assets they have no business investing in.


I have no doubt hedge funds and Berkshire Hathaway will be the last men standing when SHTF.  And, I'd rather have slightly negative alpha today than go bankrupt in the future, which is what's going to happen to most people and funds.


Finally, I would like to point out once more than the Federal Reserve alone has a larger balance sheet than the entire hedge fund industry, and certainly a much larger balance sheet than the subset of long-short hedge funds.  But hedge funds have negatively correlated strategies and positions.  What does the Federal Reserve have?  Only one position.  70:1 leverage long only 10-year equivalents.

Bazza McKenzie's picture

Your evidence about Buffet does not prove what you imagine it does.  Even assuming your statement about the pattern of returns is correct (and it may not be) you ignore the possibility of Buffett buying government policy that then made his investments profitable.  If you are going to buy beneficial government policy, you do it after the relevant investment, not before.

daxtonbrown's picture

You are correct about Buffett 'buying' government policy. His takeover of NVEnergy in cahoots with Harry Reid is a huge scam. I wrote Reid's only biography (Harry: Mney Mob and Influence), am now working on the update chapter on how Reid rigged solar, destroyed coal in Nevada to benefit Warren. Sick stuff, as much as admitted in the Berkshire Hathaway 2013 annual report.

yellencrash's picture

One wrong move and it all comes cascading down. 

ThroxxOfVron's picture

Hedgies couldn't care less about what the Client gets.  

Clients are waaaay more interested in Return OF than Retrun ON at this point in the ZIRP-a-NIRP-atrocious game.


Go ahead and TRY to cash in those chips Chumps... 

Exactly WHERE the fuck would You be GOING with a semi-truck of virtual Ben-Yellen digits?   

Swissyland apparently can't keep yo secrets no moar.    

Plain brown packages piled in P.O. Box 51009 Sandy Snatch Way, Cayman Islands?  

X marks da GPS spot of an entombed Lincoln Continental in the dunes of Qatar?

Maybe someone from MF Global or AIG or GOLDman can help You out 'cause YOU seem so much more important than the pricks running the DEposIT window when you're standing in line at the DEposIT window...


Greedy & Scared will be happy to part with 2 ...& 20 ( LOL ) until everything melts into the fucking Sea.


Seize Mars's picture

Hedge funds go all in. Ha.

What could possibly go wrong?

disabledvet's picture

You cant cut the crap on "charting" all in.

This is what "all in" in fact is: http://finance.yahoo.com/news/hedge-fund-manager-thinks-warren-142145765...

this would be like buying a PLANET! Just the thought of it is CRAZY!

That's how much money is sloshing around right now "with the biggest sea change in geopolitics since 1945."

The State Department and the CIA appear to have just been "swept away" here.
"The Regional Governors of the New American States of Iraq, Iran, Jordan and Syria appear to have been given direct control."

Lebanon, Israel, Saudi Arabia...all i have to say is "Holy Shiite!"
Baghdad could be on the cusp of becoming a VERY rich and VERY powerful City or even "City State" here with truly profound implications both immediately and over the proceeding decades.

If you're the USA you want to forward deploy the totality of US land forces now both into Ukraine and Iraq. You want every boot on the ground you can get into this one. Neither the armor nor the personnel sitting here is of no consequence now. "We have new armor on the way."

falak pema's picture

the approaching death of the financial shadow banking conquistadors.

The Universal Empire of "greed is good" is looking anaemic now. 

El Hosel's picture

Zero Hedge Funds... Has a nice ring to it, next up, Zero Central Banks.

RaceToTheBottom's picture

Quick point me out to the parking lot where everyone is taking turns running over the hedge fund managers and then backing up over them.


Seeking Alpha only works if one knows how to nail Jello to a wall.

Quants can't hit the nail on the head let alone nail Jello to a wall.

Seeking Alpha nets Beta, SUCKERS.

'Never give a sucker an even break'.....W.C. Fields

resaci's picture

If the cash were to be recalled, exchanged, or some other method of revaluation. I would not want to be holding cash if I knew this was about to happen. 

I'm almost always WRONG with investing. I'M ALL CASH!!!! Uh Ohh...