Going by theie recent performance, Goldman Sachs’ planned ETF tracking the 50 most popular hedge fund stocks might be better shorted than purchased. Retail investors can exploit any period of outflows from the hedge fund industry:
Posts Tagged ‘Hedge Funds’
Despite a bad yr with losses mounting.
Or should this be “Laughing all the way to the bank with the investors’ money”?
From NYT’s Dealbook
BONUS PAY ON WALL STREET LIKELY TO FALL Bonuses in the financial industry this year are expected to fall 5 to 10 percent, Nathaniel Popper reports in DealBook. It will also be the first year since 2011 thatcompensation for the whole industry is expected to drop, according to a report by the compensation consulting firm Johnson Associates.
There are still some bright spots in private equity and mergers-and-acquisition work, but most of the industry is struggling. The report expects end-of-year compensation in investment and commercial banking to be down 30 percent from 2009 levels.
Business lines requiring less capital, often because they are considered less risky, are seeing better returns and bonuses. For bankers advising on mergers and acquisitions, incentive payments are expected to be 15 to 20 percent higher.
Asset management requires less capital but will experience a 5 percent drop in bonuses this year as the business struggles with tepid markets and economy. The sharpest decline is expected in fixed income, where bonuses are predicted to drop 10 to 20 percent this year.
Finance remains one of the most generously paid industries in the world. The average securities industry bonus was $172,860, according to the New York State comptroller’s office.
But it is facing challenges from new regulation, slow economic growth and competition from new, technologically oriented competitors.
European banks have had to cut back and make changes to management.American banks have fared better, but companies like Goldman Sachs and Morgan Stanley have been turning in disappointing results. Alan Johnson, founder of Johnson Associates, said companies would have to cut costs significantly in the months ahead.
He noted that the ripple effects mean that Wall Street is losing its allure for the most talented young potential recruits who receive better offers from tech companies in Silicon Valley.
“In the last few years, it’s become a real issue,” he added.
A TOUGH YEAR FOR HEDGE FUNDS, BUT NOT REAL ESTATE Hedge funds have had a tough year with volatile markets, but hedge fund managers remain incredibly wealthy, Alexandra Stevenson and Matthew Goldstein report in DealBook. Larry Robbins, the hedge fund manager who founded Glenview Capital Management, bought a Manhattan penthouse on the Upper East Side with sweeping views of both the Hudson River and the East River for $37.9 million this summer.
Mr. Robbins’ real estate deal comes at a trying time for his $8.8 billion hedge fund. Last week, he apologized to investors for losing 15 percent of their money so far this year.
“I’ve failed to protect your capital,” he wrote in the seven-page mea culpa. He promised to forfeit his pay for this year.
Mr. Robbins has still managed to profit handsomely over the years from his firm’s performance and has a net worth of $2.3 billion.
His new apartment in the Charles condominium on First Avenue will be used as a second home. His primary residence is a sprawling estate on over four acres of land in Alpine, N.J.
Mr. Robbins is neither the only one splashing out on property, nor the only one whose hedge fund is struggling.
William A. Ackman, the founder of Pershing Square Capital Management, is part of a group of investors that this year closed a deal to pay $91.5 million for a six-bedroom apartment at One57, a luxury residential tower in Manhattan. Pershing Square is down 19 percent so far this year.
Despite charging such high fees, they too behave like retail investors. From Dealbook
VALEANT SHOWS THE RISK OF FOLLOW THE LEADER The recent plunge in Valeant shares has revealed the dangerous tendency for hedge funds to plunge in and out of stocks in a herdlike fashion, Steven Davidoff Solomon writes in the Deal Professor column.
The hedge funds invested in Valeant, which includes names like William A. Ackman and John Paulson, took a hit. ValueAct Capital has beenenormously invested in Valeant. Although it sold 4.2 million shares a month ago, the fund still owns 4.4 percent of the company and had made a return of more than 2,100 percent as of September.
Herd investing is common among hedge funds. Goldman Sachs runs an index of the 50 stocks most widely held by hedge funds. At the top of the list is Allergan – there are 67 hedge funds that count it as one of their top 10 holdings. It is followed by Apple and Facebook. Valeant makes No. 10 with 22 percent of its shares held by hedge funds.
“Looking at the list, one has to shake one’s head,” Mr. Solomon writes. “After all, I, too, can do this trick of investing in big and well-known tech and pharmaceutical companies, for much less than the fee of 20 percent of the profits that hedge funds charge.”
Mr. Solomon wonders whether many hedge funds are simply playing follow the leader. With thousands of stocks, hedge funds seem to be concentrating their bets on larger caps and certain industries, like tech and pharmaceuticals. This may work in a rising market, but a decline would be painful.
If hedge funds are all about alpha – finding investments that are undervalued and that can outperform the broader market – then migrating to smaller stocks might bear more fruit and make their research the most useful.
Fronm NYT Dealbook
RISKY STRATEGY SINKS SMALL HEDGE FUND At the height of the 2008 financial crisis, investors would have had a gain of more than 600 percent, according to projections in investor documents for the new hedge fund, Spruce Alpha. But the fund, which started in April 2014, has failed to turn recent market turmoil to its advantage and has lost investors 48 percent of their money, Alexandra Stevenson and Matthew Goldstein report in DealBook.
The under-$100 million fund, which was managed by the $1.5 billion Spruce Investment Advisors, has moved its positions into cash, a person with knowledge of the fund said. The fund has told investors that they can redeem what remains of their money.
This sudden reversal of fortune at Spruce has highlighted the way hedge funds rely heavily on exchange-traded funds and derivatives to profit from short-term turmoil in the stock markets, and the way some use back-tested data to market to their investors.
Back-tested results in hedge fund marketing materials have long drawn scorn from some in the hedge fund world. They are typically recreated with the benefit of hindsight, making it easier for a fund to post hypothetical good results.
It is not clear exactly what caused the big losses in August. Spruce Alpha used a sophisticated strategy that involved derivatives to amplify returns from trading in E.T.F.s. The strategy seeks to make money off stock market volatility.
Trading in E.T.F.s has become controversial with big-name investors blaming them for the violent swings in the market and Laurence D. Fink, the chief executive of BlackRock, which sells more traditional E.T.F.s, warning that E.T.F. strategies that rely on derivatives could blow up.
The tests at Spruce Alpha had apparently not simulated a situation like Aug. 24, when some E.T.F.s seized up in the first few minutes of trading.
Todd Rosenbluth, director of E.T.F. research for Standard & Poor’s Capital IQ, said leveraged E.T.F.s were an inherently risky strategy that is more akin to “gambling than investing.”
A hedgie from Texas is betting big time against the yuan Dealbook reported:
BETTING ON FURTHER DEVALUATION OF RENMINBI Mark L. Hart III, a hedge fund investor based in Texas, has made high-risk, high-return wagers that the United States housing market would collapse and that Greece would go bankrupt. His most audacious gamble to date might be his bet on a 50 percent currency implosion in China, Landon Thomas Jr. reports in DealBook.
He predicts that the extreme drop will come when foreign investors pull their money out of China, propelling a broader rout in emerging market currencies and bringing on a sustained global slump.
And he is not the only one. An increasing number of investors think thetrillions of dollars that went into risky investment opportunitiesin countries like China, Brazil and Turkey are quickly leaving. They think the pace will pick up when the Federal Reserve eventually raises interest rates, leading to plunges in currencies, corporate defaults and a global slowdown.
John H. Burbank III, a longtime emerging-market investor at Passport Capital, a $4 billion hedge fund in San Francisco, has earned stellar returns this year betting on weak commodities, and imploding emerging markets and currencies.
At the root of these investment strategies is the belief that China’s 3 percent currency devaluation was not a one-time event.
These investors think China is experiencing a run on the bank, similar to what happened to Asian countries in 1997 when their semi-pegged currencies collapsed. They also think the country’s $3.5 trillion of foreign exchange reserves will not be enough to prevent a large-scale rout.
In the first quarter of this year, $109 billion left Chinese banks for overseas institutions, according to the Bank for International Settlements, a clearinghouse for global central banks.
China has been at the forefront of the so-called carry trade, in which corporations and countries tap dollar-based lenders and invest the proceeds in higher-yielding assets denominated in local currencies, like real estate, commodities and large-scale investments. As long as interest rates in the United States remain low and emerging-market currencies remain strong, these trades have been highly profitable.
Mr. Hart calculates that the size of the Chinese carry trade is around $2 trillion and as he sees it, the dollars that have flowed into China must flow out again.
China’s foreign currency reserve ratio – in effect its net cash available to defend against speculators – is just a bit over 20 percent, putting it in the neighborhood of countries known to be vulnerable to capital outflows, like Brazil, Turkey and South Africa.
“If there is a run on the currency, everyone will want to turn their yuan into dollars,” said Jurgen Odenius, the chief economist of Prudential Fixed Income. Yuan is a shorthand reference to China’s currency, the renminbi. “And on that basis, China’s foreign exchange reserves do not rank among the stronger countries.”
Still, it is not certain that Mr. Hart’s bet will pay off. The Federal Reserve’s reluctance to increase interest rates could weaken the dollar and take the pressure off China and other emerging-market currencies.
From NYT Dealbook
ROUGH AND TUMBLE FOR HEDGE FUNDS The fallout from the global sell-off has few limits. Many on Wall Street have been caught off guard and money managers at some of the biggest hedge funds in the United States have had their vacation plans interrupted, Alexandra Stevenson and Matthew Goldstein report in DealBook.
One adviser had to hop around on conference calls from his cabin in the woods. Another said investors had requested play-by-play commentary and performance figures. With the reason for the plunge so unclear, many have not been willing to stick their necks out and speak publicly.
It is clear, however, that August numbers are not looking good for them. Hedge funds went into the sell-off bullish, with $1.5 trillion in long positions – bets that stocks will rise in price – compared with $684 billion in short positions, bets that stocks will decline in price, according to an analysis of the industry by Goldman Sachs.
The 10 stocks that Goldman said were the most widely held by hedge funds – stocks like Apple, Citigroup, Facebook and Amazon – were down from 5 to 10 percent over the last three trading days.
Leon G. Cooperman, founder of the $9 billion hedge fund Omega Advisors and a longtime market bull, is emerging as a big loser in the chaos. As of Friday, his fund was said to have lost 11 percent this month, according to people briefed on the matter. The firm was hit hard by big declines in the share prices of Allergan, AerCap, Citigroup and the American International Group.
One hedge fund manager who invests mainly in United States stocks, speaking on the condition of anonymity, said he would not be surprised if the average fund lost from 3 to 7 percent in August. He said the last week had been brutal and the losses had come far faster than most would have anticipated.
Even the world’s biggest hedge fund, Bridgewater Associates, led by Ray Dalio, was not spared. The $162 billion firm told investors on Friday that its Pure Alpha fund was down 4.7 percent for the month. Going into August, the Pure Alpha portfolio had been up 11.8 percent for the year.
After six years of a bull market run, few hedge fund managers have been brave enough to short stocks with much conviction. To take a short position, a trader sells borrowed stock in a company that he or she thinks is overvalued in anticipation of buying it back at a cheap price. Those that have taken short positions have not been hit as hard by the sell-off.
Hedge funds that scoop up distressed assets at bottomed-out prices also began to eye opportunities. “What I have told investors is the economy is fine but now is a great time to be buying some things when they get hit,” said Marc Lasry, a co-founder of the $13.9 billion hedge fund Avenue Capital Group. “Other people may be having issues,” Mr. Lasry said. “For us, that is an opportunity as opposed to a problem.”
From NYT Dealbook
CHINA KEEPS INVESTORS GUESSING China continues to enchant Wall Street, despite its tumultuous and uncertain nature, Alexandra Stevenson writes in DealBook. “You could be dead right in the thesis and you won’t make money,” said Troy Gayeski, a senior portfolio manager at SkyBridge Capital, an investment firm that has $9.4 billion invested in hedge funds.
Some of Wall Street’s best-known investors were singing China’s praises at the beginning of the year. As the market soared, many hedge funds rode the bull run, raking in profits and posting double-digit returns.
The markets took a sharp turn in late June, with stocks 30 percent off their highs at one point. By the end of July, the capital devoted to Asia-focused hedge funds had dropped by $10 billion as investors ran for the exits, according to the research firm HFR.
Investors got blindsided by some of the government’s measures to stop the slide, including a ban on “malicious short-selling.” Stuck in limbo, hedge fund managers said they were unsure how they fared in the chaos.
The devaluation of the currency last week raised even more concerns about the economy. Yet China remains attractive for some. And investors ultimately know they cannot ignore China, given its size and influence.
The billionaire hedge fund manager Julian H. Robertson announced last week that he was putting money into Yulan Capital Management, a firm that focuses on companies in the greater China region. CDIB Capital International Corporation, the private equity arm of China Development Financial, recently raised $405 million for a fund focused on private equity in China and other Asian markets.
Wall Street investors are also finding new ways to play the turmoil. Penso Advisors, a hedge fund adviser, scoped out currencies that were affected by the renminbi devaluation in an attempt to profit from the shock waves.
But Chinese markets remain enigmatic, even to those who have seen opportunities in it. “People want to play China, but it’s much harder to play China because you don’t know the rules and they change all the time,” said Ari Bergmann, founder of Penso Advisors, referring to capital controls there.
Ray Dalio, the founder of the world’s biggest hedge fund, the $160 billion Bridgewater Associates, recently tempered his enthusiasm for China. “Even those who haven’t lost money in stocks will be affected psychologically by events, and those effects will have a depressive effect on economic activity,” Bridgewater said in its July note to investors.
Chinese stocks continued their volatility on Wednesday, falling 3 percent in morning trading in Shanghai before finishing the day more than 1 percent higher. The session “made little sense other than to highlight that investors have almost no faith in a monthlong government effort to stabilize them,”according to Reuters.
Asian hedge funds’ 13-month winning streak came to an end in June.
Some of the region’s savviest investors such as Pine River Capital Management’s Dan Li and former Highbridge Capital Management Asia head Carl Huttenlocher were hit as a correction in Chinese equities spread to Hong Kong. The Eurekahedge Asian Hedge Fund Index slipped 1.3 percent last month, the first loss since April 2014, with 62 percent of the funds having reported …
Among the minority that made money in June was Owl Creek Asset Management’s $600 million Asia fund, which gained 2.9 percent, helped by long-short China investments, said a person with knowledge of the matter. The fund focused on corporate events such as mergers and led by Jeff Altman, returned 16 percent in the first half.
Nine Masts Capital, a Hong Kong-based fund expected to have more than $750 million of assets at the beginning of August, returned 0.6 percent in June for an 11.2 percent gain in the first half, according to updates sent to investors and seen by Bloomberg News.
The fund, run by former Deustche Bank AG’s Saba proprietary traders Wang Bing and Ron Schachter with co-founder James Tu, seeks to profit from pricing gaps between different securities including equity and credit sold by the same companies. It added another estimated 2.6 percent this month through July 10.
Increased regulation, volatile markets and heightened investor scrutiny have prompted hedge funds to close their operations in recent months to focus on managing their own wealth, Alexandra Stevenson writes in DealBook. Shutdowns in the industry are not new – in past years, titans like George Soros and Stanley F. Druckenmiller have closed their hedge funds to manage their own money – but these days, hedge fund managers are complaining about external factors that make it more difficult to make money, like the regulatory changes brought about by the Dodd-Frank Act. For Gideon King, of Loeb King Capital Management, running a hedge fund had just become “too cumbersome,” as he said in January in a letter to investors. “As the endless quest for becoming institutional continues on, the soul of investing might get lost, as the unmitigated compliance processes become cumbersome and interfere with the purity of speculative contemplation,” he wrote.
Disgruntled investors are putting more pressure on hedge funds as well, angry about high fees for low returns, Ms. Stevenson writes. The average hedge fund returned 3 percent last year compared with a 13.7 percent gain for the Standard & Poor’s 500-stock index, and many investors are choosing to express their displeasure by withdrawing their money. “If you have enough money and on top of that it’s a tough market and you don’t want to deal with investors asking about performance, you can take the high road and say, ‘Here’s your money back,’ ” said Steven Nadel, a hedge fund lawyer at Seward & Kissel.
Even as some investors withdraw their money, a greater number are pouring money into hedge funds for the first time, bringing the industry’s assets under management to nearly $3 trillion. That has made it difficult for hedge funds to carve out a niche, especially among activist investors, who buy a small stake in a company to pressure it to make changes. “So many hedge fund managers are turning into activists that companies often discover that more than one activist has a plan for how they can change,” Ms. Stevenson writes.
With three years to go, Warren Buffett is comfortably winning his charity bet that a low-cost index tracker would trounce a portfolio of hedge funds over ten years.
Returns from the S&P 500 index fund is beating a portfolio of funds assembled by hedge fund manager Protégé Partners by 63.5 per cent to 19.6 per cent, according to a slide Mr Buffett presented at Berkshire Hathaway’s annual meeting this past weekend.
As to what PAP ministers and hedgies have in common? They pay themselves a lot for mediocre performance.
The $11.6 billion which Institutional Investor’s Alpha calculates this ultra-elite [hedgies] was paid last year, an average of $467 million per hedge fund boss, would still seem troublingly high.
Such gains seem out of line with the value of their putative contributions. After all, the modern economy is built on collaborative effort, not to mention supportive governments and central banks. Even the greatest individual contributions would not merit an annual income, including gains from holdings, of about 10,000 times the average American salary.
To add insult to injury, Alpha calculates that at least 12 of the 25 top guys (sorry, ladies, no women in this club) underperformed in 2014. That is not surprising in a highly competitive industry. BarclayHedge, a consultant which monitors about 3,000 hedge funds, reports the average net return in 2014 was 3 percent. The U.S. stock market provided close to 14 percent.
We have one Ah Loong (since the 1980s), Lui, Yaacob and Lim Hng Kiang and had Wong Kang Seng, Mah Bow Tan, Raymond Lim and Goh Chok Tong.
From yesterday’s Lombard column in FT
Bearish hedgies have confined themselves to shorting shares in Asia-focused fund managers …
Crispin Odey is chief among Mayfair’s prophets of doom. The pioneering hedge fund manager expects collapsing eastern markets to tip the world back into recession. He has accordingly sold 6.4 per cent of Ashmore and 1.5 per cent of Aberdeen in expectation of their shares dropping. About 16 per cent and 8.6 per cent of these fund managers’ free floats have been sold short, according to Markit.
,,, Aberdeen, for example, is a skilled Asian fund manager in the view of pundit Mark Dampier of Hargreaves Lansdown. Short sellers probably just think Martin Gilbert’s group specialises in a product so dangerous that it would be transported in lead-lined vessels if it were a physical commodity.
Shares in asset managers offer geared exposure to the markets in which they specialise. Their overheads stay the same, at least temporarily, even as their assets balloon or deflate in response to fluctuating stock prices and fund flows. Bears are presumably shorting Asian stock index futures too, though less visibly.
If the bears are right, Khong and Blackstone may have to wait to receive their rewards from Sentosa
“Blackstone seems to look for distressed assets and deep value,” said Vikrant Pandey, an analyst with UOB Kay-Hian Pte in Singapore. “In the U.S. it lapped up mass market apartments for their rental yields and deep value. In Singapore the luxury segment is offering deep value compared to mass market.”
Do you, as a pension-fund manager, or rich individual investor, think that you have an above-average ability to pick out the non-superstar hedge funds that will outperform in the future? And if so, why? Also, is your superior fund-picking ability worth the average hedge-fund fee?
If you decide the answer is “no,” then you should consider investing in an index such as the HFRX Global Hedge Fund Index, which replicates hedge-fund returns net of fees — so it helps with portfolio diversification but not fee reduction.
Sure he underperforms S&P but it’s like being paid by an insurance co. to buy life insurance.
BEARISH FUND VS. THE BULLS STILL PROFITS The stock market has been rising for years, but Universa Investments, one of Wall Street’s most bearish investors, has found a way to make money anyway, Peter Eavis writes in DealBook. The hedge fund, founded by Mark Spitznagel, is set up with the aim of making money in an economic and financial collapse. Big pessimistic bets usually lose a lot of money when stocks are rising, as they have since 2009. But Universa is saying that its investment strategy has been able to produce consistent gains since then, including a 30 percent return last year, according to firm materials that were reviewed by The New York Times. The benchmark Standard & Poor’s 500-stock index in 2013 had a return of 32 percent with dividends reinvested.
Mr. Spitznagel’s strategy stems from his skepticism toward government efforts to revive the economy. He acknowledges that the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating, he contends. This theory holds that another crash will occur when the Fed stops being able to stoke the economy. Universa’s strategy seeks to profit when confidence in the central banks is strong ‒ and when it evaporates. “The Fed has created a trap in this yield-chasing environment,” Mr. Spitznagel said in an interview. The Universa strategy has produced gains of 10 percent this year, slightly less than the stock market overall. It’s been up every year since 2008, according to the materials.
Universa is not alone in saying that it can make money in good times and bad. Other firms also offer bearish bets that clients can use to hedge their stock portfolios. Such bets often cost so much that they have to be used sparingly. Yet Universa seems to be saying that its catastrophe insurance is comparatively cheap. The Universa marketing materials say that its strategy would theoretically result in a 16 percent gain if the S.&P. 500 fell 30 percent. For his part, Mr. Spitznagel is certain that another collapse will come.
It’s been over a week since Muddy Waters made allegations about the accounts of Olam. Since then Olam has come out swinging, refuting the allegations and suing.
Yesterday evening, the report was made available. Most of the issues have been flagged by analysts earlier. But there are issues about the restatements of accounts that don’t affect profits and capex that need addressing by Olam.
Remember Temasek owns 16% of Olam. So it too will be studying the report.
Before they discovered hedge funds, pension funds and endowments typically held portfolios with 60 percent in equities and 40 percent in bonds. Many would be better off if they had stuck with the old formula.
Hedge funds have trailed both the Standard & Poor’s 500 Index and a Vanguard index fund with the same 60/40 mix over the past five years, according to data compiled by Bloomberg. The balanced fund beat the main Bloomberg hedge-fund index in six of the last seven calendar years, according to data compiled by Bloomberg.
Still as Bloomberg News reports: “GLG Partners, a unit of the world’s largest publicly traded hedge fund manager, formed a long-short equities team in Asia co-headed by a former fund manager at Singapore’s sovereign wealth fund, seeking opportunities in the region’s stock market.” http://www.bloomberg.com/news/2012-07-15/glg-forms-asia-equities-team-co-headed-by-former-gic-manager.html
And a bull on US retailers.
And he has outperformed his peers!
Smaller Asian hedgies are closing (US$120m is “peanuts”). http://www.reuters.com/article/2012/06/04/lehman-hedgefund-closure-idUSL3E8H420G20120604
Not gd news for S’pore’s financial centre aspirations. It once (pre 2007 crisis) had lax rules to get these guys in, hoping they would grow.
But hope springs eternal.
Coming our way? Many of funds in Switzerland had juz relocated from London. But now the Swiss government is considering rules that would turn a relatively “light-touch” regulatory environment into “one of the most exacting jurisdictions in the world to run a hedge fund,” the Financial Times reported about two months ago.
Funny that our constructive nation-building media don’t report this news. Been too busy sliming WP, to report on a possible positive development.