Friday, April 20, 2012

Record Hedge Fund Assets and Food Stamps?

Katya Wachtel of Reuters reports, Hedge fund assets reach record levels in Q1:

Investors poured billions of dollars into hedge funds in the first quarter, helping to send total industry assets into record territory, data released Thursday shows.

Investors allocated a net $16 billion to hedge funds in the first three months of the year, according to Hedge Fund Research, which tracks industry flows and performance.

With the new capital, as well as average gains of about 5 percent for hedge funds in the first quarter, total industry assets reached $2.13 trillion, HFR found. An earlier record was set halfway through 2011, when total capital invested with hedge fund managers hit $2.04 trillion.

In one of its worst annual performances in history, hedge funds lost about 5 percent in 2011. However, the industry seemed to get its groove back in the beginning of 2012 as global equity and credit markets rallied, and managers recorded the best first quarter of performance in five years.

"Investors responded favorably to the risk shifting which occurred across financial markets in the first quarter," said Kenneth J. Heinz, President of HFR. "Sophisticated institutional investors are increasingly allocating to hedge funds as a powerful strategic portfolio complement to existing traditional holdings."

Investors sent most new capital to hedge funds with fixed income-based Relative Value or Macro strategies, which saw inflows of $12.4 billion and $7.8 billion respectively.

Meanwhile, equity hedge funds experienced redemptions of $2.9 billion, and Event Driven funds also saw withdrawals of $940 million.

Investors preferred managers with assets greater than $5 billion in the last quarter. Those firms saw inflows of $18.3 billion in new capital, while investors pulled $2 billion from hedge funds with less than $5 billion in assets during the first quarter.

How predictable, assets into hedge funds soar when markets are rallying (ie., all about beta!) and the placebo effect of large hedge funds continues to drive the institutional herd into brand names.

A couple of days ago, had a chat with Ron Mock, Senior Vice-President, Fixed Income and Alternative Investments at Ontario Teachers' Pension Plan. Ron and his team are arguably the best hedge fund investors in Canada and we discussed these record flows into hedge funds.

Ron believes that now more than ever investors need to tighten their due diligence and be a lot more careful about how and where they invest in hedge funds, placing a lot of attention on operational and liquidity risk (check out what happened to these three Louisiana pensions funds). He also told me that regardless of which superstar manager is running the fund, the due diligence and regular follow-ups have to be done properly or else investors will be in for a nasty surprise.

Unlike most of their peers, Ontario Teachers' invests billions in hedge fund through a managed account platform. This helps them mitigate operational risk and gives them full control to shut the segregated account down for performance reasons or in case a liquidity event occurs and they need to manage their liquidity risk. It sounds easy but there is a lot of work involved. Of course, Ron being ever so humble, told me this about OTPP's stellar results: "we worked hard in 2011, were a bit lucky, but we can't let up, there is a lot of work ahead of us in 2012."

What do record assets into hedge funds mean? Basically, it means more liquidity and possibly more volatility as hungry hedge fund managers will all be competing to justify why they're charging 2 & 20 to manage institutional money.

Meanwhile, on the topic of real hunger, Damian Paletta of the WSJ reports, Food Stamp Rolls to Grow Through 2014, CBO Says:

The Congressional Budget Office said Thursday that 45 million people in 2011 received Supplemental Nutrition Assistance Program benefits, a 70% increase from 2007. It said the number of people receiving the benefits, commonly known as food stamps, would continue growing until 2014.

Spending for the program, not including administrative costs, rose to $72 billion in 2011, up from $30 billion four years earlier. The CBO projected that one in seven U.S. residents received food stamps last year.

In a report, the CBO said roughly two-thirds of jump in spending was tied to an increase in the number of people participating in the program, which provides access to food for the poor, elderly, and disabled. It said another 20% “of the growth in spending can be attributed to temporarily higher benefit amounts enacted in the” 2009 stimulus law.

CBO said the number of people receiving benefits is expected to fall after 2014 because the economy will be improving.

“Nevertheless, the number of people receiving SNAP benefits will remain high by historical standards,” the agency said.

It estimated that 34 million people, or 1 in 10 U.S. residents, would receive SNAP benefits in 2022 “and SNAP expenditures, at about $73 billion, will be among the highest of all non-health-related federal support programs for low-income households.”

There you go folks, enough to make Marx roll in his grave. While the financial elite are making a killing, one in seven Americans is now receiving benefits in fiscal 2011. That's the highest participation rate on record.

And to further exacerbate economic inequality, governments all around the world, including ours in Canada, are ignoring the obvious fix for pensions. Makes you wonder, who are the real winners and losers in pensions?

Below, Philip Vasan, head of prime services at Credit Suisse Group AG, talks about the outlook for hedge funds and global markets. He speaks with Erik Schatzker, Stephanie Ruhle and Scarlet Fu on Bloomberg Television's "InsideTrack."

And Bloomberg's Scarlet Fu reports on the cost of the food stamp program as users hit record highs that are not expected to peak until 2014. She speaks on Bloomberg Television's "Inside Track."