Thursday, August 27, 2015

Hedge Funds Take a Beating?

Rob Copeland of the Wall Street Journal reports, Hedge Funds Bruised by Stocks’ Meltdown:
Hedge-fund managers like to promise their investors protection from market swings. In the recent stock swoon, many were caught off guard.

Billionaire managers such as Leon Cooperman, Raymond Dalio and Daniel Loeb are deeply in the red this month, left flat-footed by the quick plunge for stocks world-wide. Mr. Cooperman’s Omega Advisors posted a 12% decline this month through Wednesday and 10% this year. Mr. Loeb’s Third Point LLC and William Ackman’s Pershing Square Capital Management are also down big, erasing their gains for the year.

Other traders suffered amid this week’s volatility. Monday, when the market collapsed more than 1,000 points in its largest ever intraday point decline, marked one of the worst days for many managers since the crisis.

That is a hit to an industry that has for years excused its relative underperformance compared with benchmarks by promising that collections of bets on and against markets—a so-called long/short strategy—would insulate the impact of any future market gyrations.

“We’ve struck out this month so far,” said one hedge-fund manager.

There is some evidence that hedge funds are offering some protection in the deluge, since many are doing better than the 7.8% drop in the S&P 500 index this month. Stock hedge funds are down on average 5% this month, according to researcher HFR Inc.

A turnaround may yet be in the cards for some star managers. Mr. Cooperman’s Omega, for instance, was down 15% through Tuesday, but found some relief Wednesday as bets on U.S. and Japanese equities began to recover some losses.

Omega was up 3% on Wednesday alone, and Mr. Cooperman maintains his conviction that the bull market is alive, according to a person familiar with his thinking.

Hedge funds collect some of the highest paydays on Wall Street because they promise to be uncorrelated, or move out of sync, with the markets at large.

“If you were expecting all hedge funds to be a hedge against market downside, that obviously wasn’t the case here,” said Neal Berger, chief investment officer at hedge-fund investor Eagle’s View Capital Management LLC. He said he preferred managers with less exposure to the stock market.

Problems have been compounded, in the short-term at least, by a widespread conviction that the recent plunge will be followed by a fast snap back. Managers bought a record number of stocks earlier this week, Morgan Stanley said. While the S&P 500 rose nearly 4% Wednesday, it remains down for the week.

Representatives of Mr. Loeb’s Third Point, for instance, have told clients he maintains convictions in Third Point’s core positions, and is looking to add to them on what the firm sees as a short-term dip.

Third Point was down about 7% for the month through early this week, people familiar said. Third Point was up 5.7% through the end of July.

Activist managers, who became the darlings of Wall Street in recent years, are struggling in particular.

The outspoken Mr. Ackman’s Pershing Square ran into a wall, losing more than 10% to fall into the red for the year. In a letter to investors Wednesday, the firm blamed “significant volatility” and fears about China.

Activist Nelson Peltz’s Trian Fund Management is down 5.7% through Wednesday, pushing the firm into negative territory for the year, according to a person familiar with the firm.

David Einhorn’s Greenlight Capital is in a worse spot, down about 5% this month alone through earlier this week, and in the red by double digits in the year to date, according to a person familiar with the matter. For Mr. Einhorn, who in his most recent quarterly letter told investors he was struggling to find new ideas when “perception supplants reality,” troubles are compounded by an emphasis on hard-hit stocks like Micron Technology Inc. and SunEdison Inc.

Even managers not yoked to the stock market, like the world’s biggest hedge fund, Bridgewater Associates, are struggling. With Bridgewater down 4.7% for the month through Friday, its boss Mr. Dalio sent a note to clients Monday—later posted publicly—with a rather contrary view: that the Federal Reserve may launch a fresh round of quantitative easing rather than dramatically tighten.

Market observers had lately coalesced around a view that the Fed was likely to raise its historically low interest rates in September for the first time since 2006.

Late Tuesday, as Mr. Dalio’s prediction began to gain attention, he added an addendum to the public note, hedging his assessment. “To be clear, we are not saying that we don’t believe that there will be a tightening before there is an easing,” Mr. Dalio wrote. “We are saying that we believe that there will be a big easing before a big tightening.”

Bridgewater remains in the black for the year.
Hedge funds put brave face on stocks turmoil, some see bargains:
Just after the Dow Jones Industrial Average plunged over 1,000 points on Monday morning, New York-based hedge fund manager Sahm Adrangi sent around his weekly note showing his fund lost 2 percent so far in August. His conclusion regarding the market turbulence: it's a buying opportunity.

Adrangi, whose $350 million Kerrisdale Capital is still up 10 percent so far this year, stands with several other well-known hedge fund managers in saying they're staying the course in U.S. equities markets, including Leon Cooperman's Omega Advisors and Larry Robbins' Glenview Capital. Omega has lost 11 percent this month and Glenview is down 5.5 percent.

Still, "we are not getting a signal from the corporate sector or our analysts that there has been any deterioration in outlook," said Steven Einhorn, a partner at Omega Advisors, who said his firm believes stocks will rebound.

While that view may not be shared by investors whose fortunes depend on such things as the price of oil or the health of the Chinese economy, most hedge fund managers contacted by Reuters remain upbeat about prospects for U.S. stocks even after the Dow tumbled 3.6 percent and the Standard & Poor's 500 index dropped 3.9 percent in a single day. For the year, the Dow is down almost 11 percent and the S&P 500 has lost 8 percent.

Helping accelerate the recent slide, many hedge funds' in-house risk managers have been ordering traders to sell to curb losses during the turbulence. And analysts at Bank of America estimate that hedge funds specializing in stock investments have recently cut their net long exposure to 35 percent from 39 percent.

For some, the selling frenzy indicates how at least part of the investing public is inclined to panic, said David Tawil, who runs Maglan Capital, a hedge fund with about $75 million in assets under management.

"This is like a runaway train and it speaks volumes to the temperament of today's market participants," Tawil said.

Meanwhile, Jeffrey Gundlach, co-founder of DoubleLine Capital, one of the most successful fixed-income fund companies, warned that the sell-off may not be over.

"The market is wounded and it takes time for people to get around to feeling good again," Gundlach said in a telephone interview with Reuters. "You don't correct all of this in three days."

Hedge funds' month end performance numbers are expected in about a week and so far, investors in these funds have shown little taste for racing for the exits. At the same time, managers are not going out of their way to soothe frayed nerves with special calls or intra-month reports.


Unlike hedge funds, which lock up their investors' capital for months at a time, mutual funds have to redeem their investments immediately if their investors, usually people saving for retirement, want out.

Mutual fund Longleaf Partners, run by Mason Hawkins, whose holdings include Chesapeake Energy and Wynn Resorts, is down 16.22 percent so far this year.

While it's not known whether Longleaf has suffered outflows this year, that sort of performance may have accelerated investor exits from U.S. stock funds in August, after clients had already pulled $79 billion out in the first seven months of 2015, marking the fastest annual outflows since 1993.

Hedge funds meanwhile took in $64.3 billion in new cash in all types of strategies in the first seven months of the year.

Some of that cash has flowed into so-called global macro funds that bet big on currencies and recently increased their bets on 10-year U.S. Treasuries, seen as a haven in times of market stress.

Global macro funds rose 0.17 percent for the year through the end of last week while the average stock hedge fund was down 0.16 percent, according to data from Hedge Fund Research.

By the end of Monday, the Balter Discretionary Global Macro, subadvised by Willowbrook Associates' Phil Yang, had gained 1.69 percent in August, partly on a bet that oil prices would keep falling.

Macro funds returned 5.5 percent in the first half of the year, prompting investors to add $8.5 billion in new money alone in July, data from eVestment show.
No doubt about it, macro funds are where investors are focusing their attention. There are several reasons for this, top of which is they can deliver scalable alpha that smaller funds can't, but also because investors feel macro trends will dominate the landscape following China's big bang.

This is why investors are licking their chops to invest in Scott Bessent's new fund. But Soros's protege isn't the only superstar macro manager launching a new fund. Chris Rokos, a former top trader at Brevan Howard Asset Management, expects to raise about $1 billion for his hedge fund that’s set to start trading in the fourth quarter:
Rokos Capital Management will initially have the capacity to manage $3 billion, said the person, who asked not to be identified because the information is private. The 44-year-old is awaiting approval from U.K. regulators to start his London-based firm.

Rokos is courting investors three years after leaving Brevan Howard, the hedge fund he co-founded, where he had generated more than $4 billion. He’s starting out as macro funds have underperformed the industry in the last five years.

Rokos Capital’s assets will be divvied up between Rokos, Borislav Vladimirov, a former colleague at Brevan Howard, and Stuart Riley, who used to work as Asia-Pacific co-head of macro trading at Goldman Sachs Group Inc., the person said. Rokos Capital has about 50 employees and has made hires including economist Jacques Cailloux from Nomura Holdings Plc.

Once licensed, Rokos will offer clients a range of fees -- a management levy of 1 percent to 2 percent of assets and a 20 percent to 30 percent cut of profits, the person said.
Let me plug Chris Rokos, an extremely private, wealthy and brilliant trader who has assembled a top team which he will need to confront these brutal markets. If you want to work for him, you need to be highly quantitative and come from the right pedigree.

Speaking of quant funds, some are doing much better than others. Alternative investment management company Dormouse recently released July performance figures above most of its peer fund managers and global investment industry benchmarks:
Dormouse, which was founded in 2011 by former IKOS CIO Martin Coward and opened to outside capital in 2014, booked a gain in July of 5.86%. The tally brings the fund’s year-to-date return to 26.32%, compared with 0.93% for the HFRX Macro/CTA Index.

Dormouse is a quantitative systematic managed futures firm that utilizes rigorous scientific methodologies to test and develop rule-based strategies for investing in global financial markets.

When it opened to outside capital in 2014, Howard described the fund as a systematic multi-strategy fund focusing on identifying under- or over-priced liquid securities across stock indices, fixed income, rates, FX and commodities, and exploiting the increased correlation between asset classes.

Coward, who is generally considered to be one of the pioneers of European quantitative hedge funds, co-founded IKOS in 1992 and led it until December 2009. During his tenure, IKOS' unique trading strategies enabled it to become one of the most successful hedge funds in the world, with peak assets of $3.5 billion.

Following his departure from IKOS, Howard spent most of the next two years battling his estranged wife, IKOS chief Elena Ambrosiadou, in court; the two filed more than 40 lawsuits against each other in four countries, alleging spying, theft and a wide range of other alleged misdeeds.

The legal action culminated in mid-2013 when a British court determined the trading code developed by Howard while he was at IKOS were property of the firm.
His private life was all over the British papers and international media but it's none of my concern. The fact remains that Martin Coward is running one of the world's top quant funds and unlike other top funds his assets haven't mushroomed as he maintains the focus on performance.

And his ex-wife, Elena Ambrosiadou, has been displaced as the "queen" of hedge funds by Leda Braga who started Systematica Investments in January after years under prominent European hedge fund firm BlueCrest Capital Management.

Braga’s BlueTrend led a revival in computer-driven hedge funds in July, spurred by a slide in commodity prices and the strengthening dollar:
A former top trader at Michael Platt’s BlueCrest Capital Management, Braga, 49, saw her fund gain 6.2 percent last month, putting it 3.1 percent up for the year, according to a person familiar with the matter. Her Geneva-based Systematica Investments now runs almost $9 billion, said the person, who asked not to be identified because the data is private.

Computer-driven hedge funds rely on algorithms to make trades and generally make money when trends are consistent. Oil, currencies, bonds and stock indexes all reversed direction in June, in part because of Greece’s decision to walk out of talks with creditors and China’s stock market plunge.

Gains for Braga’s fund, which opened at the start of the year, were more than matched by the smaller $2.9 billion quantitative program run by U.K. firm Cantab Capital Partners, which earned 6.3 percent in July after an 8.6 percent June decline, according to an investor letter seen by Bloomberg. Aspect Capital’s $890 million Diversified Fund rose 9.2 percent last month, a spokeswoman at the London-based firm said.

The gains reflect a wider trend for quant funds. The Newedge CTA Index showed the funds, which trade on futures, gaining 3 percent in July after averaging a loss of 4.2 percent the previous month.
Sometimes I miss my days at the Caisse investing in top L/S Equity, global macro and CTA funds. I would be great at approaching all these funds I write about above but I'd grill them hard as I'm older, more experienced trading these crazy schizoid markets, more cynical, and less tolerant of poor excuses for underperformance, especially from managers who charge hefty fees and focus on asset gathering, not performance.

There is so much nonsense that is still going on in the hedge fund industry that makes my eyes roll! Stop falling in love with your hedge funds, there are plenty of titans that rise and fall in this industry. Stop listening to your useless investment consultants who typically recommend you chase the hottest funds. And if you do chase after hot funds, get ready to be burned alive.

My advice is to drill down into their portfolios and analyze their potential going forward keeping in mind the big macro themes that dominate the landscape. Drill and grill no matter who it is! Dalio, Ackman, Griffin, Loeb, whoever it is, always grill them hard and if they get pissed off or irritated, good, at least you know you're doing your job right (you're just a number to them and they should be just a number to you).

And don't just grill them when they get it wrong. Grill them hard even when they get it right. Hedge fund billionaire Crispey Odier recently made £225m from the Great Fall of China. The man who predicted the credit crunch (he wasn't the only one, even I did) saw his main hedge fund surge about 9 percent this month by betting against China after losing money on the wager earlier in the year:
The gain by Odey European, a $3.2 billion strategy that bets on rises and falls in stocks, pared its loss for the year to an estimated 5 percent as of Monday, the person said, asking not to be identified because the information is private.

Odey, 56, is among hedge fund managers profiting from the slump in China, which saw European stocks post the biggest losses since the financial crisis on Monday as the rout spread. His London-based firm, which manages $12.8 billion, told investors in a letter last month that a devaluation in China would mean deflation breaking out across the world.

Odey European’s bets on China had led to a record 19 percent loss in April. It was “attacked on all sides” after wagering China’s economic troubles would cause a slowdown that could embroil the developed world, it told investors.

Omni Macro Fund, managed by Stephen Rosen, is another hedge fund racking up profits. The fund, which manages more than $500 million, climbed 4.9 percent in the month through Aug. 21, a spokesman for the company said via e-mail. Its strategies include betting on the slowdown in China, over-valuation of global equities and a bearish view on commodities via copper futures, he said.

China’s stocks extended the steepest five-day drop since 1996 in volatile trading on Wednesday, as a rate cut failed to halt a $5 trillion rout.

The slump in global equities has resulted in many hedge funds nursing losses. The industry fell 2.3 percent this month through Aug. 21 and 1.1 percent this year, according to the HFRX Global Hedge Fund Index.
Odey is on the record with his bearish views but the volatility in his funds and his bearish views make me nervous. He can easily get killed in these markets and I predict he will have a very rough fourth quarter. If he was in my portfolio, I'd sit down with him and have a really long chat on his views and risk management.

As I stated in my latest comment peering into the portfolios of top funds, I'm increasingly weary of  of overpaid, over-glorified and in many cases, under-performing "hedge fund gurus" charging 2 & 20 for sub-beta returns. Donald Trump is right, hedge funds are "getting away with murder," but not only for the reasons he cites.

Lastly, these Risk On/ Risk Off markets are brutal. I know, I trade them and was busy loading up on biotech and got frazzled by the flash crash of 2015 but kept my cool and stuck with my positions. I'm sure some funds like Ken Griffin's Citadel made a killing scooping up shares of Apple, Amazon, Netflix, Disney, JP Morgan and GE on Monday morning as they all flash crashed. Griffin knows all about alpha, beta and beyond which is why he's now the "king" of hedge funds.

But most hedge funds stink and even brand name funds (like Einhorn's Greelight Capital) are having a tough year in 2015 as extreme volatility and low liquidity is wreaking havoc on their fund's performance (wait till the real liquidity time bomb explodes). It doesn't help that many of them got the macro environment wrong or worse still, are ignoring macro altogether.

This is why I predict barring a huge rally in the fourth quarter, 2015 will be another brutal year for hedge funds. Don't worry, there will be plenty of dumb money chasing after them even as they underperform public market benchmarks and deliver negative alpha (I call it the hedge fund Stockholm syndrome).

Below, John Burbank, Passport Capital, discusses how he is navigating today's market moves and how he managed a big gain in July. Also, his projection on the Fed raising rates. Very smart man, listen carefully to his comments. I'm not surprised his fund is doing so well this year.

And one pro discusses why he thinks we could be setting up for Q4 rally. He might be right and many hedge funds (and their investors) are desperately hoping he is as they're taking a beating so far this year.

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