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The Average Hedge Fund Is Down -1% YTD, And The Redemption Requests Are Now Flooding In
A year ago, when we reported that "Hedge Funds Underperform The S&P For The 5th Year In A Row", we thought there is no way this underperformance can continue: after all who in their right mind could possibly anticipate that a "risk-free" centrally-planned world could last for 6 years (well, maybe the USSR).
Back then we explained this now chronic, "new abnormal", regime as follows: "hedge funds are "hedge" funds and appear to have done a great job managing performance over time... but in the new normal world in which we live, where downside risk is irrelevant (until it runs you over), all that matters is return (not risk-reward)."
And yes, as the chart below shows we were wrong: because as of this moment the average hedge fund is not only underperforming the market for a record, 6th year in a row...
But as Goldman pointed out last night, the return of the entire hedge fund universe as of NOvember 19 is... negative 1%.
Why? Because virtually the entire hedge fund community was positioned incorrectly going into, and then continuing in 2014, thanks to a massive bond short, which every time it appears to start working, an exogenous shock forces round after round of short covering sprees.
That and, of course, the fact that the Fed has inverted the cost of capital, and the worst of the worst companies can issue junk debt at 5%.
Ironically, it was Goldman which was at the forefront of the sellside crew pushing hedge funds to short the 10Year because any minute now the economy would soar. Instead we now have the BOJ, The ECB, the Fed and as of last night, the PBOC, all engaging in collective easing.
Here is Goldman's mea culpa-cum-explanation:
A combination of macro and micro headwinds has challenged hedge funds in 2014, putting most on pace for another year of disappointing returns. The average hedge fund has posted a negative 1% return YTD, compared with +13% for S&P 500 and +11% for the average large-cap mutual fund. According to HFR data through Nov. 19, macro funds have fared best (+4%), while equity long/short funds have averaged a +1% return
Low volatility and dispersion have posed obstacles to fund returns this year, and we expect this trend to continue in 2015. Low dispersion, measured as the cross-sectional standard deviation of S&P 500 stock returns, indicates that the potential alpha to be gained from stock picking is small. Historically, low volatility and return dispersion have coincided with poor relative returns of both hedge funds and mutual funds. Market timing has also been a challenge: at the start of 4Q, funds were operating at 54% net long exposure, a new record high, just before the October pullback.
Strong US economic growth has historically been associated with low dispersion, and we expect both trends will continue in 2015. S&P 500 return dispersion hit historical lows in 2014. While dispersion should be modestly higher in 2015, our forecast of abovetrend US GDP growth suggests that both dispersion and volatility will remain below historical averages, implying another challenging year for fund performance lies ahead.
Unusual underperformance of the most popular hedge fund long positions highlights the challenges from sector positioning. Our VIP list (Bloomberg: GSTHHVIP) has outperformed S&P 500 by 60 bp in 2014 (13.5% vs. 12.9%) after outperforming by 9 pp in 2013 and 7 pp in 2012. One drag on returns has been Consumer Discretionary stocks, which account for 24% of the basket and 21% of net fund positioning (page 13). The list also contains no Utilities, the second best-performing sector YTD. Hedge funds were also overweight the Energy sector at the start of 4Q, even as oil prices had begun to plummet.
Yes, that's all great, however for the average hedge fund PM, who is about to collect zilch on its 20% "incentive fee", Goldman's attempt at justification doesn't buy that Christmas trip to Fiji.
And neither will this. Because while we have been skeptical for the need for hedge funds under a centrally-planned market when the Fed and its central bank peers are the biggest risk managers around, and where one can just buy the S&P for zero cost and outperform 98% of hedge funds, investors are finally noticing.
Which is probably why as Reuters reports, the redemption flood has finally arrived and "client requests to take out money from hedge funds rose to an 11-month high in November, data released on Thursday showed."
The SS&C GlobeOp Forward Redemption Indicator, a snapshot of hedge fund clients giving notice to withdraw cash expressed as a percentage of assets under administration, rose to 5.05 percent in November from 3.12 percent in October and the highest since December last year. The index is compiled by fund administrator SS&C Technologies Holdings Inc and is based on data provided by its fund clients, who represent about 10 percent of the assets invested in the hedge fund sector.
Our condolences to the hedge funds, most of them, who for the 6th year in a row failed to outperform stocks: it probably will be your last. But feel free to send your complaints to the No Rat's Asses to Give Here Department at the Marriner Eccles building c/o Janet Yellen and her Princeton- and MIT-educated central-planning peers around the globe.
And look at the bright side: since in the current risk-free, centrally-planned environment, virtually all hedge funds are assured a quiet, painless (one hopes) death, you will at least have a head start on your peers, who are still in the industry betting it all on lucky year 7, and maybe learn an actual skill that has practical uses in the real world aside from just clicking a red or green button.
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lizard man Tepper must be doing ok, with his massive SPY and QQQ positions... but still charging 2 and 20 to his muppets, who are too lazy to do it themselves?
2 and 20 baby
2 and 20.......
This year, only 2,
and a lump of coal for Christmas.
most of them don't celebrate the birth of Christ, but maybe they won't splurge for the dessert platter at Mr. K's?
Jeezus Crist, Hedgies. "Buy and hold" has been the call since the summer of '32.
That's funny. I'll add "Don't fight the Fed"and we'll have all our bases covered.
Its cool, I used to joke the analyst pit could be replaced by a very efficent shell script and a google bot. Now it's happening via the magic of Templeton indexing extreme.
Next and likely the only stopout is the Abe election, and if he does indeed lose on the very pissed off grandma-san vote.
Given nearly all institutionals have cut their bond shorts from 13F's, leverage drift is all that matters now. Hell, event trading on beat/miss is now a mugs game, with so much index correlation programs running, unless you blow through smart-trackers, your 20% beat to top line and 28% CAGR will be washed down to your friendly neighbourhood iShares Mo-cap by 2pm.
One popular trend is that fund managers are just saying 'fuckit' to stock & bond picking totally, which is making it murder for new capital to be formed and seed/series A rounds are stalling hard. If you have great picks, your edge is practically zilch vs. the index overlays. I can see this trend moving to retail soon as mutual funds recognize the old mutual fund rotation model of picking by sector weight modulation is replaced or totally outsourced to pure ETF tracking and instead of offering better Sharpe or VAR products to retirement accounts, everyone prices and markets on slip or drift to bond related trades.
In many areas property taxes are due about now and in some areas those are very steep. My cousin lives west of Houston and pays a whopping 3.5% on his $685,000 house.
That’s almost $24,000 in after tax smackers !!
Then these needs for Chirstmas gifts for Little Johnny, Mary, etc and throw in some food for the family and you'll see lots more redemptions by retail investors I bet.
this is why Texas never had a real eastate bubble, the high property tax acts as an artificial cap on prices. This is becasue americans are only trained to think of "how much per monnth" are the payments. Since the taxes often are escrowed monthly by the servicer it leaves less money for princip and interest
GS ain't losing any of their own money but the sheep must be sheared. When I got out of the market I looked at hedges but decided that my money would be better wasted on booze and women of negotiable virtue.
This is pretty simple...
A hedge fund assumes that there is a 'market' that has gains and falls that can be 'predicted' by experts.
The current 'market' is a joke (any ZHer knows this).
When a market only rises there is no way to 'hedge' - as there has to be ACTUAL falls sometimes.
BTFD only works so far, you could teach a monkey to BTFD - hence the failure of the hedge fund paradigm.
re The Average Hedge Fund Is Down -1% YTD
My "heart goes out" to all those under-performers in Greenwich CT.
It must be quite a cross to bear - especially with bonus season rolling around.
Here's at least hoping the "management" fees are enuf to put a turkey on the Thanksgiving Day table.
How is that fucking possible? Seriously? Even my most conservative clients are up double digits.
A lot of them are long-short funds and/or leveraged. Which means they've got to call the direction right AND the timing right. Miss either and they get their ass spanked.
I'm going to take a wild guess you aren't levering up, using derivatives (beyond perhaps simple covered calls) or installing short positions in Granny's portfolio.
When every asset class is has a line that goes up and to the right, most of those strategies do nothing but drag on returns (at best) or add Beta for no additional Alpha.
I understand that, but after six years they still don't get it?
I don't think Benjamin Graham made money by hedging.
To be honest Hedge funds are very useful but not in this enviorment.
When the Fed is eliminating almost all risk in the stock market why should you pay someone to hedge your portfolio? Eventually when the market goes bust, then we will see who is still standing. (If they can last that long..)
I believe in paying smart, qualified proffesionals to manage my money as the market is anything but efficient. But in this Market I dont need to. Thanks to Bernake and the crew...
There was a time when I played with simple Indexes, like S&P 500, and all those other well known indexes. I never went into NASDAQ territory because I never believed in the tech bubble sales pitch. But anyways, careful handeling of indexes allowed me to beat most of these Hedge Fund heroes. When I was a kid, the newspapers got trained monkies to throw darts at their stock pages, and in most cases monkies beat many if not all actively traded investment funds that dealt in stock picking. I may have been only 10 years old when this was done, but I never forgot the lesson. If you believe someone else cares MORE for your money than YOU do, you are going to get taken!
"Janet Yellen is focussed on real wages"
James G Ricktards in a CNBC interview
Mortgage my kids to buy SPY call options. w00t let's go fed!
These Ivy League genius whiz-kid economist Hedge Fund Managers can't make any money for their customers, yet Congress and Pres still let Ivy League genius whiz-kid economists like Greenspan, Bernanke, and Yellen run the country. And the MSM hang on their every word as if The Lord spake to them.
I'm glad my auto mechanic, the city guys who keep the water coming and sewage going, and my doctor aren't Ivy League genius whiz-kids. Probably the wheels would fall off the car, the water would give me diphtheria, and then I'd die from being prescribed methamphetamine instead of penicillin.
Financial "engineers" my foot!
I actually disagree with the tenor of this post. Not all hedge funds are "evil". Sure there are some managers out there who have inside connections and trade on information they shouldn't have (ahem Ackman), but many hedge fund managers actually exposed the phony economy in 2006-2007 and shorted the very most despicable parts of the market by piling into CDS on subprime MBS. They served a market purpose by providing participants key information on the true underlying value of these securities. It is incumbent on investors to scrutinize that information and decide if its correct, but hedge funds can't be blamed if most people follow the beat and drum of the giant investment banks.
How many hedge funds have taken taxpayer money in a bailout? How many collapsing hedge funds threatened to take down the entire world economy with it? Sure their positions can be intertwined and potentially damaging, but more so for the greedy taxpayer-stealing giant investment banks who are exposed to those positions. The every day American doesn't really get burned by them the way that these giant bureaucratic "Too Big To Fail" institutitons do. In fact, I think hedge funds provide a service to this "market" because at least they are small (relative to the banks) and typically new market entrants who help provide some semblance of price discovery and opposing views to the mainstream.
Once again, I understand there are bad eggs in the batch, but on the whole I find them much better than the giant banks. At least they don't carry systemic risk the way the banks do, and we aren't all exposed to their machinations through our deposits and whatnot. People who invest with hedge funds typically are wealthy and sophisticated investors who should know better if they end up getting smoked by it. I think the fact that they are underperforming so poorly is a sad piece of news, and will only serve to consolidate and strengthen the giant investment banking interests even further.
OK, it's nit picky but, from a math perspective, down negative one percent equals up one percent. Down one percent is a loss, not down negative one percent. Just say'n...
Simple algorithm to beat hedge funds in a modern market. Trivial algorithm that has you missing most of the big falls but taking most of the gains. It'll have you making a trade about once every couple of months. Which is quite a lot and could eat into profits, so replace 50 dma with 200 dma for fewer trades and more holding, but bigger drops.
There you go. Trivially simple pure momentum trading that leaves the hedging strategies of the most sophisticated investment managers in it's dust in the current markets.