Are Hedge Funds Burning Investors?

Lawrence Fletcher of Reuters reports, Hedge fund withdrawals jump to highest since '09:

Hedge fund outflows surged to their highest level in almost three years this month, data from hedge fund administrator GlobeOp shows, in a sign investors may be losing faith in the sector after mixed performance amid choppy markets.

Net outflows from hedge funds, as measured by the GlobeOp GO.L Capital Movement Index, which tracks monthly net subscriptions to and redemptions from funds managing around $187 billion in assets, were 1.17 percent of that total during the month to July 1.

The withdrawals compare with net inflows in each of the previous five months and were the highest level of net outflows since October 2009, when clients pulled out 3.76 percent.

The withdrawals may be an early indicator that investors, who have continued to pile into the $2 trillion hedge fund industry in recent years on hopes it can help them survive choppy markets, are reconsidering their options.

Hedge funds lost an average 5.3 percent last year, according to Hedge Fund Research (HFR), after the crisis in the euro zone and worries of a global recession rattled investors and punished all but the most bearish of strategies.

After achieving its best first-quarter performance since 2006 this year, the hedge fund industry lost some ground in April and May, and the average fund is now up 1.7 percent in the first six months of 2012.

While July's figure is affected by mid-year redemptions, as investors rebalance their portfolios, the outflows nevertheless exceeded withdrawals of 0.11 percent seen a year ago and net inflows of 1.17 percent two years ago.

"The outflows are perfectly normal for a June quarter end. The inflows are a little bit lighter than expected but I wouldn't read too much into one month's figures," Vernon Barback, president and chief operating officer, GlobeOp.

I wouldn't read too much into one month's figures either as the institutional herd keeps piling into hedge funds, but the truth is hedge funds failed to wow in the first half and some top funds are experiencing serious downside volatility.

Worse still, Larry Swedroe of CBS reports that hedge funds keep lagging stocks and bonds:

As we jump into this quarter's hedge fund update, I wanted to note an excellent book by Simon Lack called "The Hedge Fund Mirage." Lack, who spent 23 years with JPMorgan Chase (JPM), chronicles the history of the hedge fund, highlighting the many subtle and not-so-subtle ways that returns and risks are biased in favor of the fund manager.

One of the shocking things Lack uncovered is that the hedge fund industry as a whole took 84 percent of the $49 billion of generated total profits (measured by the returns provided by hedge funds above the return of one-month Treasury bills).

While that's an astonishing figure, it might be worth it if investors experienced enough outperformance. Unfortunately, we've repeatedly seen that hedge funds lag many common assets, and this year has been no exception.

The table below presents the returns of the HFRX Global Hedge Fund Index and compares it to the performance of various stock and bond indexes, both for the period 2003-2011, and also for the first half of 2012 (click on image to enlarge).

Hedge funds underperformed every stock asset class over the prior nine years and even managed to underperform the three bond indexes, while taking far more risk. In the first half of 2012, they also underperformed every stock asset class.

This mirrors what Lack found in his research as well. He examined the period 1998-2010 and found that the HFRX Index actually produced fairly good results early on. However, it seems that investors were late to the party. Over this period, the HFRX Index earned 7.2 percent, while investors earned 2.1 percent. This resulted from the fact that there were fewer dollars invested when industry returns were high and more dollars when they were low.

Lack's analysis showed that in 2008 alone, the hedge fund industry lost more money than all the profits it had generated during the prior 10 years!

Given the evidence, the only logical explanations I can think of for the continued popularity of hedge funds are that either investors are unaware of the data or that individuals invest in hedge funds for the same reasons they buy Rolex watches or Gucci bags -- they're expressions of status, prestige, exclusivity, and sophistication. Letting emotions such as these determine investment decisions is a recipe for disaster.

I interviewed Simon Lack on my blog and covered the hedge fund mirage in detail. There is nothing surprising in the article above. Most hedge funds don't deliver Absolute Returns, they deliver Absolute Rubbish and charge clients hefty fees for this underperformance.

Anyone who has ever invested in hedge funds and private equity funds knows there is a huge dispersion in the performance of managers. The 'top quartile' funds tend to exhibit performance persistence but even top funds have been clobbered in the past.

I write this as winners were announced at the first Hedge Funds Review America Awards 2012. This silly event is where grossly overpaid managers from Malakia Capital Management get together to honor Jim Simons of Renaissance Technologies for discovering the Holy Grail of hedge fund investing.

There are some really good hedge funds out there but please go back and read my comment on the rise and fall of hedge fund titans. Stop chasing after "Chase Coleman" or the latest hedge fund hot shot and get your head in the game. These are tough markets leaving most active managers, including top hedge funds, lagging behind passive stock and bond indexes (beta).

And let me correct something here. In my last comment on lessons in volatility, I mentioned that hedgies closing the gates of hedge hell will suffer the wrath of investors. A senior US pension fund manager wrote me:

Why do you say the gating option is gone? If anything, HFs have given themselves more ways than ever of gating people - investor-level gates, fund-level gates, suspension provisions that are still way too broad.
That was hardly comforting to read. All I can tell you is that large Canadian pension funds have moved their hedge fund investments to a managed account platform to control liquidity risk the next time a crisis hits markets.

And the world's best hedge fund, which is actually Denmark's national pension fund, doesn't even bother with all this nonsense. They manage assets and liabilities internally and are in much better shape than most pension plans around the world. Their boss is now being touted as the next head of Denmark's central bank, a job that would entail a drastic pay cut.

Finally, for all you hedgies looking for an edge, CNBC reports that testosterone might be the secret weapon you're craving for:

Traders on Wall Street are always looking to get an edge and pull ahead, especially in this catch-a-falling knife market. The latest secret weapon isn't some complex trade or computer algorithm, it's something more primal - testosterone.

Testosterone has been blamed for many a bar fight but for some aging traders and executives - and aging on Wall Street means 30 and up - who feel these young kids breathing down their necks and the economic screws tightening, say boosting their testosterone levels has helped them get their edge back.

Testosterone levels in men tend to be anywhere from 150 to 850 nanograms per deciliter (ng/dL), depending on age and other factors. Testosterone levels typically start to decline after age 30. For some men, as they get older, those levels fall to 200 or below. "Low T" as its been branded, has been attributed to that sluggish feeling, muscle aches, belly fat, low stamina, low sex drive and lack of focus that many just attribute to the aging process.

One of the most widely known ads for Low T is of a shirtless 64-year-old man whose head looks like a 64-year old, but whose ripped body looks like that of a man half his age. That's for a Las Vegas-based mega-clinic called Cenegenics, which has 20 centers and 20,000 patients in the U.S. They opened a Wall Street clinic a year and a half ago in the Trump Building on Wall Street. And, while some other businesses on Wall Street were floundering during the recession, their business tripled. So much so that they're hiring more doctors and moving to a bigger space by year end.

Dr. George Shapiro, the CEO and chief medical officer of the Wall Street clinic, was a cardiologist for 20 years when he decided to seek treatment from Cenegenics to get his energy, focus and muscle tone back. After becoming a patient, he was such a believer, he joined Cenegenics as a doctor to help other men - and a few women - who were similarly struggling with symptoms most just chalked up to the aging process, figuring there was nothing they could do about it.

"I get feedback within two to four weeks" from patients, Shapiro said. "Their lives have changed. It's a 180-degree turnaround. They say they can't believe they felt this way for so long and it was something that could be helped."

Dr. Lionel Bissoon had a practice on the upper west side of Manhattan doing a booming business in Botox and cellulite treatments. That all but dried up during the recession. He said one day he walked in and he had no patients on the calendar. He decided he wasn't taking the recession lying down, so he shifted his practice to testosterone treatment. At first, he was worried he was just going to get a bunch of gym rats who wanted to pump it up. To his surprise, most of the people who walked through his door were guys who worked in the financial-services industry and who were beaten down during the recession and looking to get an edge anything they could get their hands on.

They all had common complaints: "'Doctor, I'm tired. I'm run down. My muscles are sore. I get home and I don't want to play with my kids. I feel my creativity slipping. I don't wake up with morning erections,'" Bissoon said. "I said, 'If you wake up in the morning and the only thing stiff is your back, you should be taking testosterone!'"

The treatments are aimed at getting a patient's testosterone level up to an optimal range, around 850 to 900, Bissoon said.

He said about 90 percent of his patients are guys who work in finance - traders, CEOs, upper-level management. And it's not just the little guys or executives from small companies. He's got patients from some of the biggest names in finance, including Goldman Sachs (GS), Citigroup (C), Bank of America (BAC), American Express (AXP), and Morgan Stanley (MS).

The patient list at Cenegenics also reads like a Who's Who of Wall Street: Goldman Sachs, JPMorgan (JPM), Deutsche Bank (DB), Bank of America, traders from the New York Stock Exchange and Nasdaq and a lot of hedge funds.

Many complain that they used to love going to work but now they're losing their edge. Their head's not in the game as much.

In the greed-is-good era of the 70s and 80s, Wall Street stress was treated with antidepressants and antacids drugs that didn't treat some of the symptoms associated with low testosterone like low energy and sex drive.

Boosting a person's testosterone levels - and yes, it can be done for women as well as men, just in much smaller doses - can come in different forms: injections or topical creams. Testosterone in any form requires a prescription from a doctor. The dosage varies by patient and form injections tend to be done a couple times a week and creams applied every day. Doctors caution that the cream isn't for everyone particularly those with small children, a pregnant spouse or pets in the house, since it can rub off your skin for many hours after application and could cause unwanted side effects in family members or pets.

Brian Pasalich, a partner at a financial-services firm, said he used to be really athletic and had a driven personality. At 38, he started having a hard time sleeping, was hitting a wall at 3pm, was having more mood swings and losing his sex drive. He considered some of the larger clinics like Cenegenics, which work on a retainer and cost $1,000 and up and a month for integrative hormone, diet and exercise regiments, but he ultimately opted to go with Dr. Bissoon. Bissoon said his services and tests typically cost around $1,000 for the whole year, plus roughly $500 for testosterone and other medication, though some of that is covered by insurance.

After a thorough exam and analysis from Dr. Bissoon, Pasalich opted for the testosterone shots. He gets them twice a week and said after two weeks, he began to start seeing a big difference.

"I had more energy. I was back to my old self. My mood was better. I was happier my sex drive was back and it helped my attitude," Pasalich said. It also made him sharper.

"No doubt about it. When I was lower (testosterone), I was easily distracted. I felt drained and my energy was gone. Not as focused. For the first time in my life, I had started to see myself not as the young guy but as the experienced guy," he said. "You need energy to deal with things. Now, it's easier for me to handle because I have the energy and focus to deal with it. This is like how you feel after a cup of coffee you're awake and can do anything!"

Now around 40, Pasalich said, "I feel like I'm in my early 30s! People say I don't look my age I act younger - and look younger! Haha."

Indeed, Pasalich said he not only has more energy in his professional life, but his personal life as well. He said sometimes he stays out until 3 or 4 in the morning, something that makes most people over 40 tired just thinking about it!

Testosterone isn't a one-time deal - you have to keep taking it to keep your levels up. Just to give his body a break, Pasalich said he takes the shots twice a week for about three months, then takes a month off. He actually feels the difference during that month of having lower testosterone levels.

One risk manager for a big fixed-income trading desk said he suspects a few of the older guys on the desk are taking testosterone to try to fend off the younger guys gunning for their jobs. These guys, who are in their mid- to late 40s, suddenly have the energy to work later and even come back to the office after happy hour. They're taking positions themselves that, in good times, they wouldn't have touched - they would've passed on to a second-year analyst.

Bissoon said he's heard that from patients as well - that suddenly, they have so much energy, they're asking for more work.

At most companies, "nobody ever comes back and says they want more work!" he quipped.

Another guy on that fixed-income desk, a controller in his early 50s, told colleagues he gets testosterone shots because he has a girlfriend who is a lot younger than him - and she "wears him out!"

Testosterone is completely legal when prescribed by a doctor. It doesn't show up on standard drug tests, which test for recreational drugs such as marijuana, cocaine, heroin and methamphetamines. The only way it would show up on a test is if you were being tested for steroids, which tests for testosterone levels. Most office workers aren't subjected to a steroid test but Bissoon said that even if you are, as long as you have a prescription from your doctor that shows you have a medically necessary reason for boosting your testosterone levels, there is nothing illegal about it.

One former investment banker said the craziest/dumbest thing he'd ever heard of was a contractor who instead of buying expensive testosterone the right way, he got it from China and injected it himself. Now that would be illegal - not to mention dangerous.

That former investment banker, who also lifts weights, said he knows a couple of guys who've done testosterone legally, though they wouldn't admit it was to give them an edge at work - they touted the benefits in the gym and in the bedroom.

And, while he's not even 30 yet, he said he's thought about trying it himself.

"Over the past year or so, I feel like my energy level, ability to recover from exercise has gone down noticeably," he said. "I don't feel like I can get by on five hours of sleep a night like I used to."

"It's not about being a steroid guy," Pasalich said. "It's about getting back to where you were and feeling good."

David Nickle, a 55-year-old civil engineer and also a patient of Dr. Bissoon, had a similar experience. A former high school football player, he found the older he got, the worse he felt and the less stamina he had. It was getting so bad, he stopped going to the gym because he couldn't get through an entire workout without getting tired. He was dubious at first, but was opted to give testosterone cream a try. "It literally changed my life! My mood is higher. I might be mildly more aggressive but I don't know that that is worse than before!" he said.

Some foods can help naturally boost your testosterone levels, including oysters, eggs, beef, broccoli, cabbage and beef. Exercise can also help boost testosterone levels.

Not a lot of guys on Wall Street are willing to talk about testosterone or, if they are, it's to tout the sexual benefits. But Pasalich said he hopes by talking about it, it will make it less taboo - and generate more interest in testosterone research.

For now, it may be Wall Street's secret but it's no secret that it's been a boost for business for the doctors willing to dabble in the arts of testosterone and anti-aging.

Bissoon said the summer used to be a slow time when appointments trailed off by 50 percent. He didn't lose patients, rather, they just weren't coming in for appointments during the summer because they were off having fun in the Hamptons or wherever.

But this summer, with Wall Street on edge about everything from Europe to the U.S. economy falling off a "fiscal cliff" when tax increases and spending cuts are expected to simultaneously occur, his business is running at full throttle.

"The summer has traditionally been dead for me. If I saw 4 to 5 patients I'd consider it a great day," he said. "Yesterday (a Thursday), I saw 15 people," Bissoon said. He also used to take Fridays off in the summer. Last Friday? He was booked solid with 12 appointments.

His remarks echo complaints from Wall Street earlier this summer that this would be the third straight summer that they couldn't just sell in May and go away and relax. Rather, they had to remain at their desks and tethered to their BlackBerrys.

Bissoon said he started out advertising his business by buying keywords on Internet searches like low testosterone, anti-aging and testosterone-replacement treatment. over 120 keywords. Now, most of his business is word-of-mouth.

Shapiro said the same thing.

"Every guy that comes in here is a walking billboard," he said. "Guys will look and say, 'Hey, Joey. You're looking great. What are you doing?"

For Bissoon, whose Botox and cellulite business literally evaporated during the recession, testosterone - and the Wall Street guys it has attracted - was the thing that saved his business.

Nobody ever talked about what happened to the medical profession during the recession, Bissoon said." A lot of my plastic surgery friends were in dire straits. The lipo people were going nuts. I had physician friends on unemployment!"

Switching to testosterone therapy was literally a game changer.

"We decided to opt out of the recession," Bissoon said.

Great, just what we need, more Big Swinging Dicks on Wall Street pumping themselves with testosterone to 'gain an edge' on their younger colleagues and in the bedroom. Apparently, booze, cocaine and sex escorts aren't enough, traders now need hormone replacement therapy.

Listen up all you girlie men, stop pumping yourself with testosterone. It won't make your penis bigger and it most certainly won't give you an edge on the trading floor or in the bedroom. This just reminds me of the placebo effect of large hedge funds. What you need to do is ditch your high maintenance girlfriends, drastically improve your diets, meditate and get your overpaid asses in the gym to get someone to pump you up.