Weekly Newsreel

10 April 2008

“Hedge funds come unstuck on truth-twisting”:  Aussie newspaper The Age provides a great example of why AIMA felt compelled to put its foot down on anti-hedge fund hype yesterday.  The article covers a recent academic study and starts with “Has the hedge-fund industry been built on a series of lies?” and continues on to proclaim, “Now it looks as if the industry might be based on a more systematic falsehood”, “The conclusion? The promise on which the industry was built looks to be largely a false one. If investors start to question the hedge funds’ ability to produce consistently superior returns, they will start to exit the industry in droves - and rightly so.”  (see November ‘07 posting on this study)

“Tough Times for Hedge Funds”: Reuters provides another prime example.  Says this promotional story for its hedge fund summit this week: “Many investors expect the $1.8 trillion industry’s estimated 10,000 funds to be winnowed down by a few thousand in a few years. Funds that oversaw nearly $4 billion in assets have already closed their doors in the first quarter of 2008.”  Only a couple of problems: A) The number of players in any new industry is always “winnowed down” as it matures and says nothing about the overall size of the industry and B) $4billion x 4 quarters = $16 billion = if true, the lowest attrition rate in 3 years…

“First-quarter redemptions hit hedge fund industry”: While we’re on the topic, Dow Jones says “Hedge funds overall recorded losses in the first quarter, particularly in January and March. They lost 2.78% of their value in the quarter after dropping 2.46% last month, according to the investable global hedge fund index published by US data provider Hedge Fund Research.”  While ugly compared to the positive returns people have come to expect from hedge funds, this pale in comparison to the S&P 500’s Q1 loss of over 7%.

“Danish manager Jyske lines up hedge fund range shunning ‘unfair’ fees”:  Ironically, the socio-economic lens through which the mass media tends to view the hedge fund industry also plays right into the hands of some hedge fund managers - particularly those trying to convince retail investors to hand over their money.  One such manager plays to the hedge fund-as-villain archetype beautifully, telling Thomson: “We are making hedge funds a bit less mysterious…If you look at some of the hedge funds in London, [they have] very high performance fees and long lock-up periods. We think this is simply not fair.”  (Go get ‘em tiger!)

“Hedge funds grew 14.5% in 2007″:  Investment News takes a more positive view of the industry, but also suggests that hedge fund databases are suspect: “For financial advisers and potential hedge fund investors, the patchwork system of about a dozen primary database firms can serve as an initial research tool and screening mechanism. Beyond that, critics charge, the databases all fall short for reasons ranging from their incompleteness to the voluntary nature by which fund and manager information is gathered.” (see related posting on this ”patchwork”)

“Back to the roots with a high-risk hedge fund”: Meanwhile, many investors still have respect for the “old ways” - the high conviction, Soros/Bank of England world of yesteryear.  FT reports that “…a small group of hedge fund investors actively seeks out the riskiest hedge funds…’This is hedge funds returning to their roots, to the characteristics of the last decade,’ says Tom Gimbel, managing director of Optima Fund Management, the $6bn New York fund of hedge funds.”   

“Hedge funds need to be creative to keep investors”:  Tanya Beder, the former of head of Citibank’s hedge fund business, warns of layoffs in the hedge fund industry at the aforementioned Reuters conference.  Reports Reuters: “Still, some investors may not be convinced and will walk away, something that may force some large hedge fund firms to cut their staff and make other reductions, Beder said.”  The average hedge fund manages around $200 million.  At that level, staff sizes range from about 5 to 10.  At least half of those are compliance, admin and ops (whose jobs are likely quite safe) and half (5?) are on the investment side.  With the majority of their income derived from performance bonuses, we have trouble envisioning how layoffs will become a major issue for hedge funds.  We’ll see employees give up and walk away before we see mass layoffs in such a boutique industry. 

“Hedge funds’ lure still hot but success uncertain”: At the same conference, Jane Buchan, head of $10b hedge fund firm PAAMCO said talent would flood in, not out of the industry: “You will see a large number of people with big names and reputations trying to start up hedge funds…Prop trading is becoming less lucrative and more talent will try to migrate to hedge funds…”

“Investors desert the middle ground and pull $100bn out of equity funds”:  Hedge funds may be growing less than usual.  But if you’re looking for a really sorry state of affairs, check out plain old equity funds.  According to the FT, “Investors worldwide pulled close to $100bn (£50bn) out of equity funds in the first three months of this year - a record shift that accelerates a longer-term trend away from US and western European stock markets…The big long-term flows from equity funds, which have long been the mainstay product of the asset management industry, is resulting in growing urgency among fund management companies to find new strategies and products.”  (like, say, hedge funds?)

“Alpha search going strong”:  We end on a pragmatic and refreshingly dispassionate note.  Pensions & Investments reports:

“A spate of de-leveraging in capital markets has decimated some high-flying alternative strategies, but it won’t reverse the rising tide of institutional money seeking non-traditional alpha, market veterans say.

“It’s too soon to write this market’s epitaph, but “I wouldn’t expect any slowdown in the move away from plain vanilla” stocks and bonds, said Rich Nuzum, the New York-based business leader of Mercer LLC’s Americas consulting practice.

“The occasional hedge fund blow-up dominates the news, but the real problem now is the number of U.S. pension funds with “their biggest bets” in core U.S. equities returning roughly 1% a year since the decade began, agreed Richard M. Charlton, chairman and chief executive officer of investment consultant NEPC LLC in Boston.”

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