Dear Hedge Funds: This Is Who Is Responsible For Your Deplorable Returns

Tyler Durden's picture

Over the past several years we have repeatedly stated that despite protests to the contrary, the single biggest factor explaining the underperformance of the active community in general, and hedge funds in particular, has been the ubiquitous influence of the Fed and other central banks over the capital markets. 

Specifically, back in October 2015, we wrote that "as central planning has dominated every piece of fundamental news, and as capital flows trump actual underlying data (usually in an inverse way, with negative economic news leading to surging markets), the conventional asset management game has been turned on its head. We have said this every single year for the past 7, and we are confident that as long as the Fed and central banks double as Chief Risk Officers for the market, "hedge" funds will be on an accelerated path to extinction, quite simply because in a world where a central banker's money printer is the best and only "hedge" (for now), there is no reason to fear capital loss - after all the bigger the drop, the greater the expected central bank response according to classical Pavlovian conditioning."

Several years later, Goldman Sachs confirms that we were correct.

In a note released overnight by Goldman's Robert Boroujerdi titled "An Rx for Active Management" and which seeks to explain the now chronic underperformance of the "smart money", the Goldman analyst says he has identified two key considerations impacting the performance of actively managed equity funds including 1) the nature of market regimes and 2) behavioral tendencies of portfolio managers.

Among the various considerations described by Goldman, both market and behavioral, chief among which the observation that alpha is cyclical and that "there have been 4 distinct alpha cycles since 1990, with prior periods of persistent alpha (1990-94; 2000-09) each followed by a respective period of underperformance (1995-99; 2010-2016)"...

... the smoking gun in the report was the admission that "QE has been a headwind… Low Rates, Low Vol, Low Dispersion -> Low Alpha."

And the punchline: in a slide titled "A word on QE: Does Active Have A QE Hangover", the simple answer is: yes.

He makes three main points:  

1. The current run of active manager underperformance began shortly after the onset of QE (see top-left exhibit).

 

 

2. QE drove real interest rates lower (measured by the yield on 10yr TIPS). This trend towards 0%, and even negative, real rates coincided with the shift from active outperformance to underperformance (see bottom-left exhibit).

 

 

3. Equity market dispersion and volatility, both key drivers of manager tracking error and excess returns, have remained stubbornly low throughout QE and served as headwinds for manager performance (see bottom-right exhibit).

 

The slide in full:

Ironically, it has been the hedge fund community which during the current decade has been among the most vocal supporters of first Bernanke and then Yellen, and QE in general. Meanwhile, as central banks "saved" markets, they unleashed the passive, ETF revolution which is the real "great rotation", as every weeks sees tens of billions in funds shifted from hedge funds and other active managers to low-cost passive alternatives.

What can fix this abnormal market state? Here the answer is also straightforward: a market crash.

As Goldman shows, active investing lags in up markets and outperforms but only in down markets:

  • Market upside vs. downside capture for actively managed mutual funds is not symmetric.
  • In “up markets” (SPX 1-month return +2% or more), the median active manager underperforms the market by approximately 20bps, on average.
  • However, in “down markets” (SPX -2% or more), actively managed funds have outperformed their benchmark by nearly 40bps, on average.
  • In the two most significant drawdowns since 1990 (Sept. 2000 – Sept. 2002) and (Nov 2007 – Feb 2009), the median long-only active manager was able to cushion downside and outperform the market.

Which brings us to a conclusion we have stated repeatedly on many previous occasions: while hedge funds, especially established ones with significant AUM, find the current status quo relatively comfortable - after all they get to clip their management fees year after year (forget the "performance" upside), extrapolating current trends in central-bank dominated markets would eventually lead to "active" extinction, and the complete domination of ETF-based and other low-cost passive strategies. Furthermore, taken to its thought experiment extreme, a situation in which there is only passive management would guarantee that the next market crash would be truly unprecedented with few hedge funds there to hunt for bargains.

Ironically, the only event that can break this sequence of events would be a market crash, one which finally ends the current pernicious equilibrium and resets the capital markets. For that to happen however, both the Yellen and now Trump put would have to be eliminated. And that, as the past 8 years have shown, is easier said than done. For the sake of hedge funds and their dwindling assets under management, however, they better fund a way and soon.

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The_Juggernaut's picture

The markets are at all time highs.  Anyone with deplorable returns should only blame themselves.

Erek's picture

"Countless people will hate the new world order and will die protesting against it. When we attempt to evaluate its promise, we have to bear in mind the distress of a generation or so of malcontents. --- The term Internationalism has been popularized in recent years to cover an interlocking financial, political and economic world force for the purpose of establishing a World Government."  -- H.G. Wells, The New World Order, 1939, Alfred A. Knopf – New York

JRobby's picture

Death is all around now.

Yellen, a totally owned tool of the elite will kill all portfolios eventually.

The elite plan, interrupted by the Trump win, but seemingly only for a moment? Have recovered and have somehow gotten us right to the brink of WW III which would have been the same result with Hitlery. Except Hitlary would have shut down alt-media and started collecting the guns by now.

WE ARE FUCKED!!!!!

JRobby's picture

H.G. Wells - An amazing visionary.


Son of Captain Nemo's picture

Round fat white haired "pudgy" head begging to be separated from the rest of corpus and placed on a large "stick"!

Son of Captain Nemo's picture

And if the American people cared at all it would have been Alan Greenspan's or Benny B.'s head which would mean that the Federal Reserve no longer existed and the Treasury was in charge of it's own "DESTINY"!...

JRobby's picture

All these heads need to be piked. ALL!

Son of Captain Nemo's picture

"All these heads need to be piked. ALL!"

JR

If that were ever to happen you would have also seen us pulling out of the Middle East, North Africa and Western Europe once the Chairman and Board of Governor(s) were rendered "ceremoniously"!

But when insane and stupid courses through the vast majority of lemmings who's only purpose in "life" is to finish their 40 hour work week paint themselves in the colour of the mascot of their favourite sport(s) franchise!...

You know that dream is IMPOSSIBLE and more importantly OUR TIME IS SHORT!!!

JRobby's picture

According to ancient legend the white race results from a nuclear explosion in what is now the Gobi desert some 30,000 years ago.  The civilization and techniques which made the explosion possible were wiped out.  The only survivors were slaves marginal to the area who had no knowledge of its science or techniques.  They became albinos as a result of radiation and scattered in different directions. 

Some of them went into Persia northern India Greece and Turkey.  Others moved westward and settled in the caves of Europe.  The descendants of the cave-dwelling albinos are the present inhabitants of America and western Europe.  In these caves the white settlers contracted a virus passed down along their cursed generation that was to make them what they are today a hideous threat to life on this planet.  This virus this ancient parasite, is what Freud calls the unconscious spawned in the eaves of Europe on flesh already diseased from radiation.  Anyone descended from this line is basically different from those who have not had the cave experience and contracted this deadly sickness that lives in your blood and bones and nerves that lives where you used to live before your ancestors crawled into their filthy caves. 

When they came out of the caves they couldn't mind their own business.  They had no business of their own to mind because they didn't belong to themselves any more.  They belonged to the virus.  They had to kill torture conquer enslave degrade as a mad dog has to bite.  At Hiroshima all was lost.  The metal sickness dormant 30,000 years stirring now in the blood and bones and bleached flesh.  

William S. Burroughs - "Exterminator! - Astronaut's Return"

A. Boaty's picture

Good thing Burroughs wasn't wasted on smack when he wrote that. Oh, wait...

Cautiously Pessimistic's picture

No way that the sweet little ol' grandma pictured could have caused all of this money mayhem!  She spends most of her time making homemade baked goods and crocheting pussy hats that are all the rage with the young folks today.

VWAndy's picture

 They been burning the shorts as policy with QE. Thats where the real coin is made these days folks.

  Ann was right. If you cant gaurd it with your own AR it aint yours.

  Other than that its going to be rehypothocated in the crash.

VWAndy's picture

PPT = pick pocket team

economessed's picture

I'm sorry.  If you're new to hating the policies of the federal reserve, you'll need to get in line behind the 200 million oppressed common people who have been harmed by their reckless experimentation.  It's a long line, and you hedgies aren't in it.

alfredhorg's picture

"An Rx for Active Management" would be a janitor in Vermont and a muddy truck driver in a North Dakota trash dump:

https://howibeatgold.wordpress.com/2017/03/27/janitor-amassed-an-8m-fort...

https://howibeatgold.wordpress.com/2017/01/25/trash-dump-worker-invests-...

 

Both have done well despite the recent "onset of QE."

Rubicon76's picture

Somebody really needs to take the Wall Street gavel to that bitch's face.  I know, I know, it looks like they already have, but it's time for a fresh pummeling.

fishpoem's picture

Fucking hilarious! That's my laugh for today. Wait...let me read it again.

it's time for a fresh pummeling     I'm laughing even more now...and will continue.

Whoa Dammit's picture

OT; Another Atlanta Interstate (I-20) has come unglued. This time it looks like it was the attack of the mole people (or just pesky NK tunnelers ).  I like the photos in the link where it's wet from the fire department hosing it down --as if that would help.

http://www.cbs46.com/story/35166772/section-of-wb-i-20-buckles-highway-s...

live tweets from happy ( /s ) Atlanta drivers:

https://twitter.com/hashtag/atltraffic?f=tweets&vertical=default&lang=en

khakuda's picture

The Fed's policies could be called "No asset left behind."

QE and ZIRP continue in full force to this day. Short rates are actually up less than inflation has risen. The rising tide lifted all boats, you just needed to be long the tide and fuck choosing boats.

Troy Ounce's picture

 

 

Listen, our Western way of life is TBTF. There  are hundreds of millions of people living of promises which cannot be met in time.

Just tell all your friends that their pensions and bank depostis are gone, their house prices will be only 20% of current values and if they are renting out, there will be not rent for the coming 6 months.

Tell them that. You think there are smart people oit there who will have everything under control?

Don't think so. People will get mad by the millions. They will be coming for bankers and politicians and rip their heads off in front of their children with their bare hands. This is, unless they can find quickly a new enemy like the Martians.

Do yourself a favour: hide in the mountains.

Giant Meteor's picture

Or the bankers and politicians, sensing this, figure, shit, we better get a head start !

WAR !

moorewasthebestbond's picture

Thanks to Trump's flip-flopping YELLEN may just get reappointed!

Edward Morbius's picture

Donald says Yellen is no longer "obsolete".

Giant Meteor's picture

Witchhhhhhhhh, burn her, burn her !

Zorba's idea's picture

Further considered, Team Clinton/Ruben and Bankster Lobbyist$$$ buy repeal of "Glass Steagal" then followed by market orgy till housing/mortgage backed securities Tap-out! Market collapse globally, W's Hank Paulson saves Banksters and other allied parties (AIG) by sticking up American taxpayers. Trillions of debt gets stacked up as Ben and Janet print oceans of worthless fiat. Obumass plays golf for 8 yrs while Markets become disconnected from any semblance for price discovery and the "Asset class/ .01 percentiles get a yuuge lift." Avg American gets BOHICA'd with a tsunami of debt that will never ever be discharged. TBTF Banks get bigger and more fractionalized...More BOHICA on its way.

Edward Morbius's picture

Donald will need more QE and NIRP when SHTF in the next year or so, or maybe tomorrow.

GunnerySgtHartman's picture

It would be smarter to let this thing blow itself into a million pieces and then we rebuild from the ground up.  As we all know, the Fed's intervention in 2008-2009 prevented a proper correction from taking place; when the next one happens, it will be even more harsh than 2008-09 would have ever been even if the Fed tries to intervene with more QE and ZIRP/NIRP (but they will try anyway).

Frankly, I think the next one will be so rough that nothing the central banks can do wiill stop it or even soften it.  We HAVE to get the sh*t out of the system, and that is the whole purpose of corrections.

A. Boaty's picture

Everyone else has to endure a down market so hedge funds can rake in FRNs?

Having said that, end the Fed. Stop manipulating markets. Let the chips fall where they may.

lester1's picture

The #1 hedge fund in the world is at 33 Liberty Street NYC !

orangegeek's picture

The Fed is the number one hedge fund in the world - worth trillions thanks to that fucking nigga.

 

nice industry GS / JPM, or at least what is left of it - total fucking shit show

zagzigga's picture

When SPY stays overbought at 70+ RSI for extended periods of time and just keeps crawling higher and higher, all puts get destroyed. By removing the need for hedging the FED has destroyed the hedge funds.

LeftandRightareWrong's picture

2 and 20 starts to be drag over time on any strategy.  Even buy 'n hold SPY.

LeftandRightareWrong's picture

What is the next Big Short?  AMZN type stuff, or the REITs?

pitz's picture

Active managers have almost always underperformed.  They should blame themselves and their excessive compensation, not Yellen.

Tim Knight from Slope of Hope's picture

It continues to astonish me that this woman reproduced. Just how many paper bags were involved?

Blankfuck's picture

Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........Fed fuckers will fix it...........Fed fuckers will print it.........Bankers win CEOs win and you are thrown in the garbage bin...........

apike3137's picture

FYI: "deplorable" is a COMPLIMENT...right?