Friday, April 22, 2016

Pity The Hedge Fund Manager?

Will Wainewright and Nishant Kumar of Bloomberg report, Hedge Funds Suffer Worst Outflows Since Financial Crisis Era:
Hedge funds suffered the worst withdrawals last quarter since the tail-end of the financial crisis as wild swings in stocks and commodities caused losses at some of the best-known firms.

Investors pulled a net $15 billion between January and March, reducing assets under management to $2.86 trillion from $2.9 trillion, Chicago-based Hedge Fund Research Inc. said Wednesday. The last time outflows were higher was in the second quarter of 2009, when $43 billion was redeemed.

Clients are redeeming after many hedge funds failed to protect them during market turmoil in the second half of last year and again at the start of 2016. Managers including John Paulson, Chase Coleman, Andreas Halvorsen, Ray Dalio and Bill Ackman posted losses in some of their funds last quarter, even as global stocks edged out a small gain with dividends reinvested.

Hedge funds following macro economic trends to bet across asset classes suffered $7.3 billion in outflows, while those betting on corporate events saw about $8.35 billion pulled out, the data showed. Fund managers speculating on the success or failure of mergers and acquisitions attracted $400 million.

Clients of Tudor Investment Corp. have asked to pull more than $1 billion from the hedge fund firm founded by billionaire Paul Tudor Jones after three years of lackluster returns. Tudor’s main BVI Global, a macro fund, fell 2.8 percent in the first quarter, according to an investor document. That follows gains of 1.4 percent in 2015 and 3.5 percent in 2014.
Goldman’s Cautions

Och-Ziff Capital Management Group LLC, the largest publicly traded U.S. hedge-fund manager, saw its assets fall by about $1 billion in March to $42 billion on April 1, according to a company filing. Och-Ziff had $47.5 billion under management at the end of 2014. The OZ Master Fund, the firm’s main multistrategy pool, lost an estimated 3.4 percent through March, according to the filing.

Hedge funds are bleeding cash just as Goldman Sachs Group Inc.’s Mike Siegel and UBS Group AG are advising clients to increase allocations to alternative money managers as a protection against volatile markets. Siegel, who oversees about $190 billion at the bank’s asset management unit said insurers should use hedge funds to diversify even after their recent declines.

Hedge funds lost an average 2.6 percent in the first two months of the year after a 1.1 percent loss in 2015, according to the HFRI Fund Weighted Composite Index. They recovered some losses in March as equities and commodities markets rallied.

But their correlation with market volatility has led to investors questioning their use as a shock absorber in a portfolio. The New York City’s pension fund for civil employees voted to exit its $1.5 billion portfolio last week, deciding that the loosely regulated investment pools didn’t perform well enough to justify the high charges. They typically charge investors a 2 percent management fee and keep a fifth of profits.
Paulson, Coleman

Paulson & Co.’s Advantage and Advantage Plus funds, which wager on companies going through corporate events including spinoffs and bankruptcies, tumbled 15 percent in the first quarter, according to a person familiar with the matter.

Halvorsen’s Viking Global lost 8.8 percent in the quarter, Coleman’s Tiger Global Management hedge fund lost about 22 percent, Dalio’s Pure Alpha fund tumbled 6.7 percent and Ackman’s activist hedge fund Pershing Square Capital Management lost 25.6 percent.

Managers deciding to return capital to investors were responsible for some of the drop, HFR President Ken Heinz said in a statement. Michael Platt’s BlueCrest Capital Management, once one of Europe’s largest hedge funds, said in December that it would return money to its clients.

Hedge-fund shutdowns outnumbered startups last year for the first time since 2009, HFR said last month. There were 979 fund closures and 968 startups.
You can add Blackstone's Senfina to that list above, it is down 15 percent year-to-date.

Mary Childs and Lindsay Fortado of the Financial Times also report, Investors pull $15 billion from hedge funds:
Hedge funds have suffered their worst quarter in seven years after more than $15 billion was pulled out by investors starting to fight back against the high fees being charged across the industry.

The total amount invested in hedge funds fell to $2.86 trillion in the first three months of the year, marking the first time since 2009 that the sector has faced two consecutive quarters of net outflows, according to data from Hedge Fund Research.

Sharp market moves have wrongfooted many firms, leading to poor performances in the first quarter from funds such as Bill Ackman's Pershing Square, and rankling investors already disgruntled over fee structures charging 2 per cent for management as well as 20 per cent of profits. A broad index of hedge fund performance fell 0.7 per cent in the first quarter, according to HFR.

Fed up with paying "exorbitant fees" for poor returns, the New York City Employees' Retirement System has cut its $1.5 billion program, pulling money from managers including Perry Capital and Brevan Howard. The shift comes about 18 months after California's pension scheme also scrapped hedge funds from its portfolio.

At the same time, sovereign wealth funds have been withdrawing billions from asset managers globally as they turn their attention to supporting their own faltering oil-dependent economies.

Letitia James, public advocate for the New York pension scheme, attacked managers who "balk at negotiations for investor-favorable terms" believing they "could do no wrong, even as they are losing money".

"If they were truly fiduciaries and cared about our members, they would never charge large fees for failing to deliver on their promises," she said. "Let them sell their summer homes and jets, and return those fees to their investors."

The largest first-quarter redemptions in the sector came from macro strategies, which saw investor outflows of $7.3 billion, and event-driven funds, in which $8.3 billion was pulled — more than half from activist strategies.

However, some pension funds are also boosting their exposure to hedge funds. Finland's state scheme plans to invest $500 million in the sector this year, while the Illinois State Universities Retirement System is investing $500 million in hedge funds for the first time. US insurers are also tapping the sector to help generate returns.

Many managers, who often pool their own money alongside investors', caution that a volatile market is the worst moment to move away from hedged strategies.

"More up-and-down markets with a lot of dispersion should be a really good environment for hedge funds," said Judy Posnikoff, a founding partner of Pacific Alternative Asset Management Company, which invests in hedge funds. "If we're not in a bull market, where are you going to go?"
Matt Philips of Quarts reports, Hedge funds are doing terribly:
Pity the hedge fund manager.

The elite, highly compensated men—they’re mostly men—who run money for the world’s wealthy are having a devil of a time finding a way to make decent returns. As an asset class, hedge funds lost 0.4% during the first quarter, according to research firm Eurekahedge.

That might not sound like the end of the world. But it’s an especially poor showing, when you realize that investors who simply bought index funds tracking plain-vanilla benchmarks for stocks, such as the S&P 500, or bonds, such as the Barclays Aggregate US index, fared far better. The S&P 500 and the Barclays Aggregate returned 1.4% and 3%, respectively, for the first three months of the year.

Hedge fund clients have noticed that they’re not making money. As a result, they’ve yanked roughly $15 billion in assets from hedge funds in the first quarter, the worst stint of redemptions since 2009, during the nadir of the Great Recession.


Of course, hedge fund managers can argue that while they might be trailing the big indexes this quarter, when they win, they’ll win much bigger than they’ve lost, making their services worth the high fees they charge.

But the surge of withdrawals suggests more and more of their clients don’t see it that way.
According to a team of JPMorgan analysts led by Nikolaos Panigirtzoglou, hedge funders should brace for a total outflow of at least $25 billion this year.

Admittedly, this is represents less than 1% of total assets hedge funds manage, something Mark Yusko reminded me on twitter, but it could be the start of something much bigger (click on image):


Go back to read my recent comments on the bonfire of the hedge funds, a requiem for hedge funds and let them eat their summer homes.

When it comes to hedge funds, I pull no punches and think a lot of hedge fund "gurus" are nothing more than glorified asset gatherers charging alpha fees for leveraged beta.

There are excellent hedge fund managers out there but this is a brutal environment and I openly question whether some of these brand name funds are too big for their own good, and more importantly, for the good of their institutional investors.

What else? Charging 2 & 20 in a deflationary world when interest rates are zero or negative and when you're not delivering real and meaningful alpha on a consistent basis is simply indefensible. Worse still are the lame, pathetic excuses for such lousy underperformance.

I'm so glad I'm out of the allocation business as I would be redeeming from a lot of underperformers, especially from anyone who doesn't look me in the eye and come clean as to why they're down 6%, 8%, 10% or more in a quarter (and I wouldn't wait for them to contact me first).

I have zero tolerance for nonsense and lame excuses and I couldn't care less which hedge fund manager is siting in front of me. If they're blowing smoke my way, providing me with lame excuses as to why they're severely underperforming, I wouldn't sit there like a doormat lapping up the nonsense they're feeding me. I would be grilling them hard until they answered all of my questions and I felt comfortable that they are able to come back from such losses.

For example, Miles Johnson and Lindsay Fortado of the Financial Times report, Odey fund loses 31 per cent in four months:
A brutal start to 2016 for Crispin Odey, the outspoken British investor, has wiped out almost half a decade of trading profits in his flagship hedge fund in less than four months.

The value of the €729m Odey European Fund has now fallen 31.1 per cent to the middle of April, dragging it back to its lowest level since January 2012. His large bets against currencies and equities have gone awry, making his stockpicking fund one of the worst performers among large vehicles this year.

Mr Odey, who has been among the most prominent British financiers to back the country voting to leave the EU, has held strongly bearish views on emerging markets and China for more than a year.

In a letter to investors dated March 31, Mr Odey wrote that years of ultra-low interest rates had resulted in a wave of misallocation of capital spending and investment across the world. He believes that continued quantitative easing will result in a grand reckoning for the global economy.

“QE is merely encouraging misdirected investment,” Mr Odey wrote. “Remember it was Keynes, the architect of [central bank] thinking, who said, ‘It is good for people to travel, goods to travel but not for savings to travel.’ The disconnect between travelling and arriving may be coming home to roost. It will make the retreat from Moscow appear painless.”

The latest fall comes after his fund lost 19 per cent of its value in April 2015 while speculating on the value of the Australian dollar. That loss meant that Odey European ended 2015 down by 12.8 per cent, one of the worst performances among large hedge funds in the world that year.
A few things here and it's important you all realize this. I don't care if it's Crispin Odey, Ray Dalio or George Soros, when anyone thinks "the market is wrong and I'm right", it shows an incredible lack of humility and zero in terms of risk management skills.

Even if you believe in Crispin Odey's story, don't fall in love with the story or the manager, focus on the process, performance and people and ask some very tough questions like "how the hell did you allow your fund to lose 20% in three months?" or "why are you taking a huge short bet on the Aussie with no regard to risk management?!?".

Same thing with Bill Ackman whose fund finally jumped in April:
Bill Ackman is having a good month. You can read that again.

After a terrible start to the year, Mr. Ackman’s Pershing Square is up big in April. The assets in his publicly-traded fund have risen 12% this month. The fund has now gained in three straight weeks, the best stretch since it went up three straight weeks in late July and put it at an all-time high in early August.

The fund is still down 17% this year, and about 40% below that high-water mark from August. Pershing Square had been hammered in the first quarter, and since last August, by the precipitous decline in Valeant Pharmaceuticals International The pain, though, spread to other holdings such as Platform Specialty Products as well as a share slide in some of biggest holding.

Valeant is up 27% this month, and his biggest positions in Mondelez, Zoetis and Air Products are all up as well. Even Herbalife, which Mr. Ackman has very publicly bet against, is cooperating, falling 5.2% over the last month.
I actually like the way Valeant (VRX) has been trading lately and Bill Miller might be right, it can easily double from here given how negative sentiment is on this company (click on image):


Still, there has been a lot of technical damage on this stock and the truth is Bill Ackman should have unloaded a huge chunk of it when it was trading above $250 (to be fair, he publicly admitted this after getting clobbered).

More broadly, I like the way the biotech sector has been trading lately as both large (IBB) and small (XBI) biotechs have bounced nicely off their lows and the sector is due for a big rally after suffering one of its worst quarters ever (click on image):


But there is no denying the best sectors so far this year are those leveraged to global growth, namely, emerging markets (EEM), Chinese shares (FXI), energy (XLE), oil and gas exploration (XOP), metals and mining (XME) and industrials (XLI).

In fact, hedge funds that bet big on a global recovery last summer might have suffered a rough patch but guys like Carl Icahn are laughing all the way to the bank nowadays (click on image):


Will this momentum carry through in the second half of the year? That all depends on whether oil doubles by year-end or whether the Great Crash of 2016 clobbers global risk assets, especially if China's pension gamble falls short and another Asian crisis hits us this year.

So far, that surging yen which worried me last week has abated recently and this is good news for global risk assets and hedge funds leveraging their positions using the yen carry trade. Conversely, it's bad news for Crispin Odey who thinks that central banks and the market are wrong and he is right (hedge your positions old chap!!).

But don't shed any tears for Crispin Odey, Alan Howard or Michael Platt, their fortunes might have taken a hit amid market turmoil but they still figure among the richest hedge fund managers in the UK and world.

So, pity the hedge fund manager? Nope, not me, these guys don't know how good they've had it for so long charging alpha fees for leveraged beta but I think institutional investors are fed up and now more than ever, they're willing to walk away and never look back.

I'd love for all these big shot hedge fund managers to really step up to the plate and live and die by their performance figures alone. That's right, no management fee if you are managing multi-billions, show me what you've got!

Of course, the reality is that there's so much nonsense in the hedge fund industry and it's a powerful one. It doesn't surprise me one bit that big hedge funds and mutual-fund companies emerged as winners of Wall Street pay rules proposed Thursday.

And poor Elizabeth Warren, she blasted the SEC for approving Steve Cohen's new firm but fails to realize just how powerful the perfect hedge fund predator is and how he can't wait to come back to charge clients huge fees (at one time, he charged 3 & 50!) for managing their assets (still, Senator Warren can find solace knowing that Wall Street is underwater).

But you've got to hand it to Steve Cohen, he's always ahead of the curve when it comes to picking stocks like Celator Pharmaceuticals (CPXX) which is the number one stock year-to date (click on image):


Then again, despite charges from Zero Hedge, Point72 says it has perfect compliance and Cohen would be the fool of fools if he did anything remotely shady in the stock market (everyone is gunning for him and he knows it).

Also, Steve Cohen doesn't always pick great biotechs. He got clobbered on several positions including Sarepta Pharmaceuticals (SRPT) which got slammed hard yesterday following news that the FDA cast doubts on its proposed drug to treat a fatal form of muscular dystrophy (but stock is bouncing big today on FDA voting questions, up 35% after getting slammed 44% yesterday).

One thing I can guarantee you, Steve Cohen would never accept being down 20% in a quarter and he would never face his investors with lame, pathetic excuses as to why he's down (love him or hate him, the guy has balls and zero tolerance for underperformance).

Below, U.S. Senator Elizabeth Warren, a firebrand for strong financial regulation, asked on Thursday why securities regulators approved Steve Cohen's new firm as an investment adviser after barring the billionaire from managing other people's money until 2018 (if clip doesn't load, watch it here). Bloomberg's Winnie O'Kelley has more on "Bloomberg Markets" (second clip).

Also, CNBC reports that investors are starting to turn away from hedge funds to fight back against the high fees. I wouldn't hold my breath, this isn't exactly a stampede out of hedge funds, at least not yet.

Fourth, Michele Gesualdi, CIO of Kairos, and Ryan Kalish, co-founder of Allocator, discuss hedge fund leverage and changes within the industry.

Lastly, Hugh Hendry, the hedge-fund manager who profited by betting against banks during the financial crisis, said he’s now speculating on a recovery in Japanese stocks as the nation’s policy makers maintain their policy of negative interest rates.

Very interesting discussion, worth listening to his views, especially if you are worried about the Great Crash of 2016 which hasn't happened yet. Please remember to show your support for this blog by contributing via PayPal on the right-hand side. Have a great weekend!





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