Monday, February 8, 2016

Hedge Funds Getting Crushed?

Kaja Whitehouse of USA Today reports, Hedge funds keep getting crushed:
After a rough 2015, "smart money" hedge fund investors are getting crushed again this year as some of their favorite stocks get walloped.

The average hedge fund that invests in stocks — as opposed to debt or currencies — dropped 3.66% in the first month of the year, according to data from Hedge Fund Research.

Some of the biggest names to get trounced include:

►Pershing Square Capital Management, the publicly traded investment vehicle of billionaire hedgie Bill Ackman, fell 11% last month following a 20% decline last year, data from the web site shows.

►Larry Robbins' Glenview Capital, famous for picking stocks that could benefit from Obamacare, dropped 13.65% in January following a decline of 18% last year, according to data from HSBC's Hedge Weekly report, a copy of which was obtained by USA TODAY.

►Marcato International, a well-known activist fund run by Ackman protege Mick McGuire, fell 12.1% last month following a 9% loss last year, according to HSBC.

Even last year's winners had a tough time of it in January:

►Trian Partners, whose Nelson Peltz made headlines fighting with DuPont last year, lost 7% in January,HSBC data showed. Last year, Trian posted gains of more than 4%.

►Tiger Global Management — run by Chase Coleman, a descendant of Peter Stuyvesant, one of New York's earliest movers and shakers — lost 14% last month, according to Reuters. Last year, the tech focused fund posted gains of 6.8%.

►Maverick Capital, run by Texas billionaire Lee Ainslie, fell 2% in January, HSBC data showed. The hedge fund firm stunned with a 16% gain last year.

The decline follows big losses in some of the hedge fund industry's top stocks. Shares of Amazon.com Inc. (AMZN), for example, are down 25% this year. Apple Inc. (AAPL), another hedge fund favorite, is down 10% this year, while Netflix Inc. (NFLX) has dropped 27%.

Pharmaceutical stocks, which hedge funds poured into last year due to the heavy merger activity, are also taking a licking amid concerns about drug prices.

Valeant Pharmaceuticals (VRX), a hedge fund favorite that hurt Ackman's Pershing especially hard, is down 5% this year, following double-digit declines last year.

Chemical giant DuPont (DD), meanwhile, is down 12% this year. Energy companies and financial stocks are also getting crushed on fears that they will get hurt by falling oil prices.

One minor exception to the January doldrums appears to be Greenlight Capital, a hedge fund run by famed short-seller David Einhorn. The fund eked out a 1.3% return following a 20% decline last year, HSBC data showed.
If you think that's bad, check out Carl Icahn, he's having a terrible day. A few weeks ago I questioned whether hedge funds are escaping the market carnage and this just confirms that even the best of them are getting crushed in these brutal markets. When it comes to hedge funds, it's all about leveraged beta!

How brutal are markets? When you see hedge fund darlings getting deFANGed as well as shares of LinkedIn (LNKD) and Tableau Software (DATA) being sliced in half or more, you know there's a whole lot of pain in Hedgeland right now.

Speaking of pain, Rob Copeland and Bradley Hope of the Wall Street Journal report, Schism Atop Bridgewater, the World’s Largest Hedge Fund:
Employees at the world’s largest hedge fund carry around iPads with an app called “Pain Button.” It tracks negative feelings like “angry,” “frustrated” and “sad” with the twist of on-screen dials.

Pain is part of the “complete honesty” philosophy at Bridgewater Associates LP, which has made more money for investors than any other hedge fund in history. But those same principles have led to an unprecedented showdown atop the Westport, Conn., firm, which manages $154 billion.

Bridgewater founder Ray Dalio and his presumed heir apparent, Greg Jensen, have called for votes on each other’s conduct.

The 66-year-old Mr. Dalio has asked the firm’s management and stakeholders committees if they believe Mr. Jensen, 42, has “integrity.” The term is defined in a 123-page treatise written by Mr. Dalio as never saying something about a person that you wouldn’t tell the person directly.

Mr. Jensen, one of two co-chief executives at Bridgewater, asked the same group to decide if Mr. Dalio is fulfilling the succession plan he began in 2011.

Bridgewater is known as much for its idiosyncratic culture as its investment prowess, and Mr. Dalio has long espoused that conflict is essential and helps the firm perform at its best. Employees are told to air disputes openly and then try to resolve them, which sometimes escalates into a vote.

The tumult between Messrs. Dalio and Jensen is an extreme example even for Bridgewater. They have never confronted each other so intensely before, according to current and former employees.

In the past, employees have been fired, or “sorted out,” for repeatedly violating the firm’s core principles, according to people familiar with the matter. Bridgewater is run on a set of 210 principles that have been downloaded from its website more than two million times.

Principle No. 72 applies even to the billionaires who lead Bridgewater: “Hold people accountable and appreciate them holding you accountable.”

The potential impact of the disagreement is unclear. The fact that the votes were called at all has unleashed employee anxiety about Bridgewater’s future leadership, people familiar with the matter say.

Messrs. Dalio and Jensen declined to comment in detail about their dispute.

“The question here about Greg is whether he said things about me on tape in our meetings that he did not discuss with me before,” Mr. Dalio said in a written statement to The Wall Street Journal.

Mr. Dalio, Bridgewater’s chairman and co-chief investment officer, said the issue isn’t about “a traditional definition of integrity.” He said he believes Mr. Jensen has “incredible integrity by any traditional definition.”

Mr. Jensen, one of the firm’s two other co-chief investment officers, said in his own statement that the disagreements have been “healthy.”

“It’s the way that they can be resolved that keeps us all here and resulted in the incredible working relationships that have made Bridgewater so successful,” he added. “I can’t imagine working in any other place.”

As of Friday morning, the votes hadn’t been completed, according to a person familiar with the matter. In a statement Friday evening after this article was published online, Mr. Dalio said “this particular dispute has already been resolved via our process.”

A spokesman declined to comment further, including on the status of the votes.

Mr. Dalio has produced an estimated $45 billion in net gains since launching Bridgewater in 1975 from his two-bedroom Manhattan apartment. The gains top all other hedge-fund managers, according to LCH Investments NV.

The firm was born as a research shop that offered global macroeconomic opinions and veered into investing when Mr. Dalio got $5 million from the World Bank’s pension fund in 1985 to trade bonds. Bridgewater has since grown to 1,500 employees.

Because of Bridgewater’s impressive long-term performance, its investors include many of the largest pensions in the U.S., such as the Pennsylvania Public School Employees’ Retirement System, and sovereign-wealth funds.

Bridgewater’s main hedge fund, called Pure Alpha, has an average annual return of about 13% after fees since its start in 1991.

Bridgewater has stumbled a bit lately. For the first time in more than a decade, the firm manages fewer assets than it did a year earlier. A widely mimicked fund that uses passive, automated programs to shift investments among asset classes like currencies and bonds fell 7% last year.

Pure Alpha, which makes more traditional hedge-fund investments posted a gain of nearly 5%, outperforming peers.

The principles created by Mr. Dalio aim to remove human emotions such as fear and greed from decision-making and maximize profits. He said Bridgewater’s “evidence-based meritocracy” is “not easy for outsiders to make sense of, but it is the secret to our success.”

Shortly after organizing the principles in a written list about 12 years ago, Mr. Dalio had them printed, and some employees began carrying the principles at all times.

“Firing people is not a big deal—certainly nowhere near as big a deal as keeping badly performing people,” he writes in Principle No. 130. Any manager who talks about subordinates who aren’t in the room is “a slimy weasel,” according to Principle No. 5.

While discord is encouraged, Mr. Dalio’s words often are taken as gospel. One former Bridgewater employee recalls debating with other employees for as long as an hour whether a misused apostrophe in one of Mr. Dalio’s research reports was intentional or not.

Mr. Dalio says most employees “are in fact rewarded” for challenging him. About 20% of the feedback he got in the past two years was negative, he adds.

About 25% of new hires leave Bridgewater within the first 18 months, but the turnover rate declines after that, according to the firm. Bridgewater is a major recruiter of recent graduates from elite colleges such as Harvard University, Dartmouth College and the Massachusetts Institute of Technology.

Those who stick around embrace Bridgewater’s philosophy. That includes Mr. Jensen, who started at Bridgewater as an intern about 20 years ago. He became the likely successor to Mr. Dalio after the Bridgewater founder began in 2011 to cede some of his control and ownership.

Bridgewater requires employees to watch professionally edited training videos that use case studies to show how the investment firm’s principles should be used in day-to-day work. Tens of thousands of hours of videos and transcripts are stockpiled in the “Transparency Library.”

One video shows Mr. Dalio standing at a dry-erase board and demonstrating how the marker ink won’t fully rub out with an eraser, according to people familiar with the video. Mr. Dalio prods Bridgewater employees at length about why they bought the dry-erase board, why it doesn’t work and how the bad decision could have been avoided, those people say.

Other videos feature disputes involving high-level executives. A video that Bridgewater titled “Eileen Lies” details the handling of accusations several years ago against Eileen Murray, a management committee member.

Bridgewater won’t comment on the accusations, but people familiar with the video say it describes the discovery that a prospective employee’s resume contained a falsehood.

Ms. Murray, who is co-CEO with Mr. Jensen, wouldn’t comment. “I can assure you that if Eileen was assessed to be a liar she wouldn’t be here today,” Mr. Dalio said. “We and she couldn’t imagine her working anywhere else.”

Technology is helping Bridgewater gather ever more employee data. The firm has hired former officials from the National Security Agency and Central Intelligence Agency, as well as the International Business Machines Corp. scientist who led the development of its Watson artificial-intelligence platform.

Data-mining company Palantir Technologies Inc., one of the most valuable private companies, helps Bridgewater analyze employees’ internal ratings.

While at work, Bridgewater employees constantly rate each other on more than 60 attributes, including “willingness to touch the nerve,” “conceptual thinking” and “reliability,” people familiar with the matter say.

The system feeds data into an ever-growing set of benchmarks, comparable to a stock index, that flag low scores and can eventually lead to a smaller bonus for an employee or even being let go.

In an iPad app called “Dot Collector,” employees weigh in on the direction of conversations while they are happening. Employees also are quizzed about the outcome of meetings. Any meeting of at least three people is expected to hold at least one poll, according to people familiar with the matter.

The average employee accumulates more than 2,000 “dots,” or individual ratings from other employees, a year, a person familiar with the matter says.

Those ratings are distilled into a “Baseball Card” that shows every employee’s average rating for various attributes. The card also includes each employee’s overall “Believability Index,” which reflects how much weight the employee’s opinion has in debates and polls.

The “Pain Button” serves as a kind of diary of unpleasant experiences. It can be used to spot negative patterns, track progress in dealing with conflict and potentially avoid similar experiences in the future.

The app reflects another core tenet at Bridgewater: “Pain + Reflection = Progress.” Employees are frequently encouraged to “get in synch” and hash out their disagreements, current and former employees say.

Bridgewater is working on a new app called “Dispute Resolver.” When it is finished, the app will suggest ways to handle disputes between disagreeing employees, help escalate the dispute to a mediator or even begin the process of forming a tribunal where both sides submit evidence, according to a person familiar with the matter.

The focus on decision-making is related to Mr. Dalio’s belief that “emotional hijackings” can impair decision-making in investments and life.

After honing ideas through debate and discussion, Bridgewater employees write trading algorithms that buy and sell investments automatically, with some oversight.

Those algorithms can be triggered by outside data. For instance, data showing an increase in global shipping might set in motion an algorithm that boosts a particular Bridgewater fund’s exposure to capture profits from the change.

A decade ago, employees rated each other as little as once a year, recalls Mike Kane, who spent his first year out of college as an associate at the firm.

“It’s difficult to have a strong company culture as you get larger,” says Mr. Kane, adding that he appreciated Mr. Dalio’s willingness to let young employees take on major responsibility and speak their minds so openly.

After Messrs. Dalio and Jensen called for the votes, about a dozen top employees and stakeholders at Bridgewater began reviewing video recordings of meetings, transcripts and other material to prepare, according to people familiar with the matter.

Voters were told to keep quiet. After the Journal asked Bridgewater about the dispute, the firm warned employees in an email that it would find anyone responsible for leaking information, people familiar with the matter say.

Under Bridgewater’s policies, vote results and each person’s individual votes are made available to the rest of the firm. “All employees see what would be hidden in most companies,” Mr. Dalio said.
So Ray Dalio's no. 2 is trying to impeach him and according to the FT, Greg Jensen has been asked to take a step back from his current role as co-chief executive:
Mr Jensen will shift his responsibilities away from his role as co-chief executive, a post he shares with Eileen Murray. He will focus more on serving as co-chief investment officer, alongside Mr Dalio and Bob Prince.

Bridgewater had started the process of conducting a search for a new co-chief executive before this particular disagreement.

Mr Dalio said that he and Mr Jensen “both expect to work together, probably for the rest of our careers”.

Mr Jensen echoed the sentiment in an email on Friday: “Both Ray and I are committed to Bridgewater. Ray and I have had [and will have] many disagreements. We have a process for handling them and both of us believe that process is working well. It is through this unique culture of open disagreement that we have produced the meaningful work and meaningful relationships that those who work here and our clients have come to expect.”

Bridgewater said on Sunday: “No decisions have been made. We are still trying to determine the proper mix of responsibilities among our executive team. Greg is incredibly capable, we are working to find the proper balance for him between managing the business as CEO and managing the investments as CIO. Fortunately, we have a great process and culture for working through this as part of our transition.”

Mr Dalio had praised Mr Jensen in a 2006 speech, citing him among the “extraordinary people” who had helped build the company’s success. He described Mr Jensen — who, at 31, had already spent a decade at Bridgewater — as being “in possession of the best package of character attributes I have seen in any human being”.

At a certain point of seniority at Bridgewater, employees must invest a large percentage of their net worth into the company, so that their incentives are aligned with that of the firm’s growth, and effectively making a departure economically impractical. Bridgewater also enforces strict non-compete agreements on those who have had access to its intellectual property.

Westport, Connecticut-based Bridgewater oversees $154bn and has generated the most money for investors since launching in 1975, according to an annual list compiled by LCH Investments. It has notched up $45bn in net gains since inception, including $3.3bn last year, according to LCH data.

The management turmoil had worsened amid weaker performance and scrutiny of Bridgewater’s flagship $80bn “All Weather” fund, which invests according to a “risk parity” strategy that passively buys and sells based on the mathematical volatility of assets.

The actively managed Pure Alpha fund, run since 1991, returned 4.7 per cent after fees last year. The HFRI Fund Weighted Composite index fell 0.9 per cent, according to Hedge Fund Research.
As I recently noted in my review of the best and worst hedge funds of 2015, Bridgewater's Pure Alpha's performance while positive was unimpressive in a year full of macro events. And most pensions are heavily invested in the All Weather Fund and they're losing money in the last three years, especially last year when mad money wreaked havoc on risk parity strategies.

Three years ago, I openly worried that the world's biggest hedge fund was in trouble but nobody was paying attention. When you see public disagreements like this being aired out in the media, it's not a good sign no matter what Ray Dalio and Greg Jensen state.

Let me take it a step further and openly question whether Bridgewater's obsessive focus on "radical transparency" is diverting its attention away from much more pressing cultural and performance issues at the fund. There's something going on at Bridgewater and I don't like it one bit.

Dalio may be warning of asymmetric downside risks in the global economy but he should think long and hard of the asymmetric power structure at his fund which gives the impression that he likes to be openly challenged but in reality, what he says goes.

How do I know? I met the man, think very highly of him and his fund, was among the first pension fund managers in Canada to invest in Bridgewater back in 2002, but he's very imposing and intimidating and I get the sense that a lot of employees there fear him. And when you live in a constant state of fear and have to constantly rate each other (which breeds paranoia, not cooperation, and stifles creativity), a lot of internal angst and animosity which has been bottled up for years is bound to seethe through at a time when the fund is losing money. I think this is what's happening now.

I could be wrong but I think Ray Dalio needs to focus less on "radical transparency" and more on radically transforming the culture of his shop. And no matter what he says, it's still his shop and anyone who challenges that in any way, shape or form will be led to the guillotine.

[Note to Ray Dalio: I'd be more than happy to fly in and give all of Bridgewater's employees a talk on why I think Bridgewater's radical transparency has reached a point of diminishing returns. Also, stop hiring data geeks from Harvard and MIT and start hiring real people who overcome real challenges in their life. If you ask me, Bridgewater needs more diversity in its shop, including people with disabilities. Talk about radical transparency and dealing with adversity is cheap, let your employees see what that means on a daily basis so they can gain real and much needed perspective on life.]

Let me get back on track with the topic of this comment. While many hedge funds are getting crushed, some top performing muti-strategy funds are doing just fine. Citadel is buying the NYSE market making business, giving it more of power to enter an exit trades in a flash crash millisecond.

And then there's Yale secretive hedge fund, Nancy Zimmerman’s Bracebridge Capital which has gone from $5.8 billion in assets four years ago to $10.3 billion today with a return of about 10 percent a year since its inception:
That makes it the largest hedge fund in the world run by a woman. Zimmerman, who survived a 1990s scandal involving Russia, her husband and Harvard University, is so successful at avoiding the limelight that Leda Braga’s $9.5 billion Systematica Investments Ltd. is often cited as the top woman-led firm by assets.

Swensen, who runs Yale University’s $25.6 billion endowment, and Thomas Steyer of Farallon Capital Management originally staked Zimmerman in 1994 with about $50 million. Yale’s investment now is valued at around $1 billion, making it one of the endowment’s most profitable.

“She’s employing this leveraged strategy to exploit pricing differentials in the fixed-income world with an obsessive focus on risk,” Swensen said in an interview.

Boston-based Bracebridge has had only eight losing months since 2009. The fund’s 2 percent gain last year eclipsed the industry, which was up 0.6 percent on average, according to data compiled by Bloomberg. Hedge funds had trouble navigating unexpected market events, including a devaluation in the Chinese currency in August, a rally in European government bonds and a steep drop in oil prices.
When you get seeded by David Swensen and Thomas Steyer and post these type of risk-adjusted returns, you're just as impressive, if not more impressive than those who are trying to one up Soros.

But I caution you, even though ultra low rates are here to stay, beware of large hedge funds taking massively leveraged bets in fixed income markets. It typically ends badly when genius fails!!

What else? I find it very interesting that small and nimble Canadian hedge funds are outperforming the market while their much larger U.S. counterparts are getting crushed. Perhaps many U.S. institutional allocators should take advantage of the cheap loonie and come invest in small Canadian hedge funds (for a fee, I can assist them finding people like Martin Lalonde at Rivermont).

I know, investing in Canadian hedge funds isn't sexy and it's certainly not risk free, but global allocators need to expand their platform and start looking for gems all around the world, not just focus on the "biggest and brightest" hot U.S. hedge funds. Playing that game is fraught with risks too.

Below, as markets keep plunging lower on Monday, longtime stock bull Jeremy Siegel said Monday he expects short-term volatility to linger until oil prices and China's currency stabilize. "There is a double threat of deflation, which is very scary for the market," Siegel told CNBC's "Squawk Box."

I've been warning my readers to prepare for global deflation for years. I even told Ray Dalio this back in 2004 when we met and he fired back: "Son, what's your track record?". Not bad on my macro calls, less so on my micro calls but I'm still plugging away in these crazy, schizoid markets.

In the second clip below, watch Dalio discuss meaningful work and meaningful relationships through radical truth and radical transparency. Listen to his comments carefully but take this stuff with a shaker of salt because there's a lot of marketing behind his comments and I think there's a radical problem at Bridgewater which has yet to be properly addressed (Ray, take my offer above seriously and you can tape me all you want!).

Lastly, while offense wins games in football, it's defense that wins Super Bowls. Sunday's Super Bowl 50 proved that once again. I suggest all hedge funds getting crushed in these markets listen to Al Pacino's great speech below from the movie Any Given Sunday.

Love this clip, Dalio should show it at the next Bridgewater assembly. "Life is a game of inches" and in any fight, it's the guy or gal willing to "fight and die" for that inch who will come out ahead. Now get out there and fight for that inch (or basis point) and remember to subscribe to this radically truthful blog which says it is like it is even if it pisses off some pension plutocrats and hedge fund gods!



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