Hedge Fund Net Short Exposure Drops To Lowest On Record

Tyler Durden's picture

We have frequently written about the underwhelming performance of hedge funds over the last several years and continue to be perplexed by the seemingly misinformed decisions of the largest pensions and endowments to pay ridiculous fees for consistently lackluster performance (for example, see "Why Hedge Funds Remain The Worst Performing Asset Class Of 2016").  As Bloomberg recently noted, long-short funds tracked by Credit Suisse returned negative 4.3% in 2016 compared to a positive 9.5% return for the S&P, the worst relative performance for hedgies since 2011.

Hedge Fund Returns


Of course, nothing illustrates the idiocy of the "2 and 20" hedge fund fee structure better than Warren Buffett's $1 million bet with a hedge fund manager in 2008, in which Buffett bet that the S&P would outperform hedge funds over a 10-year period.  (see "The Traditional "2 & 20" Fee Structure Is Taking A Hit As Hedge Funds Continue To Underperform").  And, for those who like to keep score, the S&P is currently winning by well over 40%, on a cumulative basis. 

So, after years of underperforming their benchmarks, hedge fund managers have apparently decided that if they can't beat the S&P they might as well match it.  As Bloomberg notes, at the end of 2016 the net exposure of long-short hedge funds tracked by Credit Suisse soared to all-time highs.  That said, gross exposures barely budged which means managers simply took off shorts and added long positions to their portfolios.  And while effectively buying the S&P will help dress up the relative performance of these funds, we're not sure it's is a strategy worthy of a "2 and 20" fee structure.

Hedge Net Exposure


Meanwhile, as the S&P continues to soar to new highs on a daily basis, earnings trends for the past couple of years would seem to suggest that hedge funds may be dropping their shorts at precisely the wrong time. 

S&P Earnings


Of course, when your lack of short exposure blows up your "hedge" fund, it's not really a big deal because you'll be able to point to all the other funds that did the same thing and simply raise a fresh billion dollar fund and start the game all over again.

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Sudden Debt's picture

Normal, there's a big chance Trump will devalue the debt and the dollar.

That means Dow 30K in 1 to 2 years.

The Saint's picture
The Saint (not verified) Sudden Debt Jan 11, 2017 5:55 PM

That last chart is an abomination.

Or is it an Obamanation?


sixsigma cygnusatratus's picture

"...there's a big chance Trump will devalue the debt and the dollar."


At first, either "debt restructuring" (bond market collapse, deflation) OR massive currency printing (inflation).  I think partial bond default at first followed by lots of printing later.  China, Japan, Middle East and largest holders of Treasurys would be the biggest losers.

Paul Kersey's picture

Boeing orders are at a seven year low, but the share price is close to an all time high. The market has almost totally divorced itself from the real world economy, but the money changers, rentiers and kleptocrats are making out-of-this-world profits.

Hohum's picture

It's all anti-investment.

Grandad Grumps's picture

Ya know, if truth and fundamentals return to the market, then it will break ... but it will be followed by the greatest expansion and release of surpressed technology EVER!!!!

Do you know that the US government has claimed exclusive rights to roughly 6000 patents, which they keep secret? I learned about this practice when working with 2 Johns Hopkins professors, one of which worked had worked at LLNL (Livermore Labs) and another that was tasked with modeling Atlantic Ocean currents after the Deep Water Horizen disaster ... big time math genius.

CJgipper's picture

You had me until the conspiracy theory.  They do keep certain patents secret for security reasons, and they get licenses in those, but they pay royalties and....... that conspiracy is insane man.  Patents expire after 20 years anyway.

Youri Carma's picture

S&P continues to soar to new highs on a daily basis until it doesn't.

GreatUncle's picture

In a keynesian fiat system the short is becoming the fabled unicorn exept for those on the inside pulling the strings.

Not until the keynesian fiat system breaks will it truly fall and if it does not going to be alot left to measure your worth against.

Sure it may dip for a time but it is guaranteed to rise again very soon.

centerline's picture

The lead in graphic looks like Viagra ad.  lol.

Zarbo's picture

My, what a large, green arrow.

Mikeyy's picture

Another mutli standard deviation from the mean position is spec shorts in 5 year treasury futures (and other tenors as well).  If you have a Bloomberg, see CBT55NCN Index <GO> and you'll see Speculative Shorts are a muti-decade high.

Lorca&#039;s Novena's picture

Shoulda shorted Bitcoin.... wat a disaster. I bet fonestar is on suicide watch...


The Wall Street Hedge Fund Quants all booked alpha mark-to-market off of a subprime mortgage environment that was Securitized & Financialized with the collective expectation of Ivory Tower Economists that housing prices would keep going up to infinity. All the large Hedge Funds are now booking huge losses because they all eat retard sandwiches, and they are Functionally Retarded when it comes to basic math. Clearly, what makes these pathetic excuses for human beings function is only the short term gain. Hedge Funds will all be bankrupt very soon if they are not getting the picture that they are already there. Furthermore, their Quants cannot grasp the consequences of their actions because they are too young and have not fully developed with regard to long term planning ability due to an immature frontal cortex which is responsible for executive function with regard to long term planning. All the Wall Street Hedge Fund largesse was borne out of the Greenspan Put, Central Banking, and hubris on the part of the Committee to Ruin The World.


In other words, the Joos did it with Glass-Steagall just like they were warned not to during the first depression.

Skiprrrdog's picture

OMG, its that super hero again, 'green arrow boner'...

kenny500c's picture

I imagine that many of these pension fund and other money managers get something in return for investing money in the hedge funds.


Northern Lights's picture

I used to work for a company that did all the back office accounting and reporting for various hedge fund managers.  During all of my years there, I had only seen a positive YTD ROR at the end of 2007 and then again at the end of 2014.  All those years in between were negative.  As I was wrapping up my employement at this company, 2 funds were winding down operations.  One of the funds was toast because they shorted the entire fund with the CHF against the EUR.  The other fund lost two of their most capable managers to a competitor and the fund experienced a negative YTD ROR of -9%.  They voluntarily wound down this fund of all external capital investors.  Since then in Sept 2016, it was made public another one of the funds this ex employer of mine had was also closing up shop.  Talking to people, my ex employer has not been able to secure any new hedge fund business.  I am of the opinion also that hedge funds are pretty much dead and done.