This page has been archived and commenting is disabled.
Over Two Thirds Of All Hedge Funds Are Under Their High Water Mark
For an update on the sad state of the hedge fund industry, we go to the FT which confirms what we had been reporting every week in 2011 courtesy of the periodic HSBC hedge fund industry report, namely that less than one third of all hedge funds in 2011 paid material bonuses to their employees (or if they did, they better have done it without the knowledge of their LPs), because "more than two-thirds of hedge funds are below their high water mark., the point at which they are able to charge investors performance fees." And since performance fees, or the 20 in the "2 and 20 part", is where the discretionary component of analyst, trader and PM compensation comes from, it is safe to say that the bulk of hedgies did not have a good year in 2011. And, in fact, for many the anger goes far back: "It can be a long way back. Credit Suisse calculates that 13 per cent of hedge funds have not earned any incentive fees since at least 2007. Most of these are small funds with assets of less than $100m, which struggle to retain staff without the income available from performance fees." One such fund was of course Citadel which after its abysmal performance in 2008 only managed to climb above its high water mark in the past week for the first time since 2007. And while this is not really news, what is far more curious is that according to Credit Suisse hedge funds have resumed levering once again.
The bank’s hedge fund clients currently have leverage of 2.5 times, meaning that the average fund has $150 of debt added to each $100 of capital, off the post-crisis low of 2.4 times, but well below the 2.8 times high.
Cash balances have also fallen from 25 per cent of assets in the summer to 22 per cent now as confidence has improved.
Since there is just under $2 trillion in hedge fund "equity" or capital, leveraging this 2.5 times means that there is net purchasing power of roughly $5 trillion in the market, and the 0.1 turn of incremental leverage explains why the ongoing redemptions from equity mutual funds are being more than offset by a slowly levitating market.
Yet a far more important question is how many of these funds will fizzle out in the near-term and have to bring their leverage to zero by implication?
For many funds significant trading gains or a sustained change in stock market momentum is needed. Just over a third of event funds, which seek to trade around corporate activity such as mergers, or long-short equity funds that pick stocks, are at least 10 per cent below their high-water marks.
Such managers dealing with losses must also fight to retain assets. While the industry attracted $70bn in new capital in the first three quarters of the year, according to Hedge Fund Research, it saw very slight outflows in the final quarter as investors redistributed capital.
For instance, clients pulled $8.6bn from event and equity-driven funds in the fourth quarter, in pursuit of better performance. Macro funds, which seek to profit from broad economic trends, attracted $7.9bn, while relative value arbitrage – a strategy of seeking price differences between related securities that was one of the few not to lose investors money last year, according to HFR – took in $5.9bn.
Unfortunately, with hedge funds, or the once upon a time smart money, now trapped chasing the vagaries of momentum investing, where positions change on a daily basis courtesy of the far more dominant HFT, sometimes several times during the day, it is easy to see why the market is now far more irrational than ever, as fundamentals will not be a factor for a third year in a row, and the only two factors in investing will be "frontrunning the central bank" and "chasing the intraday stock heatmap." That neither are viable long-term strategies is obvious, but at this point that is a given.
»
- 8678 reads
- Printer-friendly version
- Send to friend
- advertisements -
RAND PAUL DETAINED BY TSA AT NASHVILLE AIRPORT
ITS ON BITCHEZ!
http://dailycaller.com/2012/01/23/report-tsa-detains-sen-rand-paul-in-na...
Possibly a sympathy for the devil ploy / play?
...poor victim, blah blah blah
(No animals (politicians) were harmed in the making of this.)
Most people lose money trading, period. The "pro" image of a fund be damned...
I have an overpriced Ivy League sheepskin. When I was there, I was a member of a frat house when I drank and did every sorostitute within eyesight. My rich daddy found me this job after graduating from drunken U. Please give me your money. I am an expert. ;)
Nice Vampire, very nice.
hedge Funds are financial WMD. Hedge funds are the visible 5% of the dark pool ice-berg.
Their very public are swallowed by mostly pension funds and university endowments (talk about a massive circle-jerk)...
But when ready, they are the pin in the money grenade. Greece is ample tell of their power.
They must laugh at thier losses in private (at least all the major players).
ori
/au-kicks-a-joke-more-
Right you are. There are only two sad things about hedgies:
1. They are still some around, loaded with leveraged/borrowed money (eventually the taxpayer's, of course)
2. Tyler Durden likes' em (we all have vices, this is his)
Is this why GS, JPM, etc. are buying treasuries before the FOMC? Disappointment stemming from a lack of QE3 could trigger the next downturn (since QE3, FrAA+ce, Greek default, etc. are all priced in). Since hedgies are overleveraged as is, that may drag the market down further and lead to a significant rally in treasuries?
Surely they will take the bonus and crash the fund saying MF Global borrowed the client funds ?
Bankers/hedge fund foreclosures based on no bonuses
Last roll of the dice.
As the other guy said : I like my Hedge FUnds, wet, ragged and melting hot.
NO Credit Events allowed!
This makes CDS a sure thing. :0
What's a hedge fund to do?
Hedge this: Obama has to cough up his self-suppressed documents on Thursday to Judge Malihi (Man Of Courage).
Three days until martial law clampdown?
???
Hedge this: What if there is no contender for the Democrat nomination, due to Obama's ineligibility?
It's a Romney-Newt shoo-in! Please someone wake me from this nightmare.
I share your sentiment. Romney, Newt and Obama all suck.
"chasing the intraday stock heatmap"
Funniest thing i've read all morning.
This is probably a simplistic comment, but here goes. I'm an amateur investor who works in a different area for a living & only devotes ~3-5% of my time, on average, to thinking about / actioning my investment strategies, yet I've done better than these experts over the past 2-3 years & would have done exceptionally well if I'd bought PMs a bit earlier. Should I apply for a job?
How can they have missed (one assumes this, from the % quoted under bonus level) the steep & sustained rise in PMs - a phrase including the words 'trees', 'wood' & 'can't see the' comes to mind.
From other excellent postings here, I learn, that there are probably lawyers (now being fed raw meat in their cages) about to instigate procedings against any sovereign state that attempts change bond redemption rules (or rather default terms enforcement) to force universal haircuts as & when they mature. A very clever move by hedge funds? From the above report, don't count on it.
All that money being pulled from hedge funds - has it been moved to chase profits elsewhere..??
Or is it looking for a safe haven, like PM's..??
They put most of the money in savings and checking accounts. If they had put 10% of that money in PM, gold would be over $2,000 by now.
In light of the fact that countries with high productive capacity or rich in natural resources are bypassing US dollar as a median of exchange and the trend is growing at an alarming rate. I don't understand why people want to stay in cash.
The only thing that will cure their ills is for a reset to happen. Most of those funds need to go away and the capital needs to be destroyed.
Not surprising considering every short has been obliterated. So if a true hedge is put in place then the short position has been walloped. The market is simply no longer trading "freely" and has no chance of trading "free" as long as Bernanke is at the Fed.
We have never had free markets. Only the illusion of such and ,that illusion is slowly fading away. If we trully had free markets we would have free competion of currency.
Never. Never is a very long time. Never had we had this amount of daily intervention in my lifetime and I'm old enough to have seen quite a few market conditions.
I have been around for a while myself. I've seen a lot of markets. While these markets are the most manipulated markets I've seen, my point is more a statement on gold. A fiat currency gives the fed a larger roll in said manipulations.
When their performance is negative do they get the 20% subtracted from their 2%, posted against their future earnings, clawbacked etc? Otherwise this gives them an irrational incentive to take enormous risks. After all 1 outstanding year and 3 crap years might beat 4 okay years under that methodology.
Not even a problem for me when there is heavy liquidation in the financial markets coming up soon. i will have a huge stake in the VIX ETF and i will be laughing to the bank during a meltdown.
Is the title of this article a logic test of some humorous kind? It wouldn/t surprise me if 99% of them are under their high water mark.