For hedge funds, June was the cruelest month (so far).
As Bloomberg reports [6], the crowd of levered beta chasers hedge fund world was pounded in a month in which the centrally-planned boat nearly keeled over as everyone moved from port to starboard. "Hedge funds posted their biggest monthly loss in more than a year after signs that the U.S. Federal Reserve may scale back its unprecedented stimulus triggered a selloff across global markets. Hedge funds lost 1.4 percent in June, the most since May 2012, paring the gain in the first six months of 2013 to 1.4 percent, according to data compiled by Bloomberg. Hedge funds that use computer models to decide when to buy and sell securities slumped 6.3 percent last month, extending losses for the year to 7.1 percent, and emerging-market stock funds declined 6.6 percent, leaving them down 9.7 percent in 2013."
And visually from Goldman, or the futility of paying 2 and 20 to underperform a centrally-planned market by 80% (not to mention constantly being crushed by idiot-money mutual funds) for the fifth year [7]in a row:
[8]
Which once again brings up what we discussed in "Ben Bernanke Crushes Hedge Funds: Average Hedgie Underperforming S&P by 65% In 2013 [9]"
Here is the problem: having underperformed the S&P for five years in a row [7], many LPs are starting to get tired of not only underperforming stocks but paying out 2 and 20 on all the lost upside (and not only due to such leftfield surprises as RICO Stevie [10]).
The bigger problem is that by the time the crash finally comes, there will be no hedges left as the Federal Reserve will have made sure all shorts get crushed as confirmed by the relentless outperformance of the most shorted stocks [11]relative to the market (and why we continue to suggest quarter [12]after quarter that [13]going long the most shorted stocks is the most lucrative "alpha" strategy) as "hedge" funds abandon all hedging in droves and become "long-onlies", a problem further compounded by the fact that when the real crash does come not one hedge fund will be positioned properly and able to generate any alpha.
The biggest problem, at least for the active management community, is that with the global central banks now stock market activists and buying stocks outright [14], it is they who have eliminated the downside risk and by implication made hedging redundant.
In summary: when the world's central banks are now in the business of managing risk for mom, pop, the E*trade baby and Johnny 5, hedge funds are completely worthless.