Tuesday, July 19, 2016

Hard Times in Hedge Fundistan?

Rob Copeland of the Wall Street Journal reports, Bridgewater’s Flagship Fund Falters as Another Thrives:
The world’s largest hedge-fund firm posted billion-dollar swings in its largest funds during the first half of the year, highlighting how unpredictable markets are roiling many of Wall Street’s most prominent traders.

Bridgewater Associates LP’s flagship hedge fund dropped about 12% through the end of June, according to people familiar with the firm. That marked the worst start to a year for the Pure Alpha fund since 1995. Pure Alpha bets on and against markets world-wide in an effort to stay ahead of macroeconomic trends.

Meanwhile, the firm’s slightly smaller All Weather fund rose 10%, according to these people. All Weather uses a risk-parity strategy intended to adapt to a number of market conditions.

It wasn’t clear exactly how much Bridgewater gained or lost in dollar figures, as the firm runs permutations of its funds that use borrowed money and other trading strategies to amplify bets.

Pure Alpha is the firm’s largest fund, amounting to about 45% of the firm’s roughly $150 billion under management, according to a person familiar with the matter. All Weather encompasses about 40% of the asset base, this person said. A fund that blends the two approaches accounts for the remainder.

Institutional Investor’s Alpha trade publication reported Bridgewater’s June performance figures Wednesday.

Bridgewater’s billionaire founder, Raymond Dalio, has been outspoken in predicting an eventual economic crunch. In a client note this spring reviewed by The Wall Street Journal, he said “the global economy is slowly moving toward an inflection point” that will be reached within the next year.

In that note, he repeated his longtime thesis that persistent low central bank interest rates will be increasingly ineffective in boosting economies world-wide.

And yet the S&P 500 is up 4% this year, including dividends, despite volatility that followed Britain’s vote to exit the European Union last month.

The average hedge fund lost about 1% through June 30, according to early estimates from researcher HFR.

But Bridgewater is hardly the average hedge-fund firm. Not only is it the largest by assets, but it has made more money for its clients than any other hedge fund in history, according to asset manager LCH Investments. Its clients include some of the world’s largest sovereign-wealth funds and pension funds.

Before this year’s losses, Pure Alpha reported an average annualized return of 13%, after fees. Backers continue to line up to hand over more money, as there is an extensive waiting list of prospective investors into the fund, people familiar with the fund said. It has risen every year since 2000.

Automated, computer-driven approaches similar to All Weather did well in the immediate wake of Britain’s vote last month, benefiting from longstanding bets on a strengthening U.S. dollar.

The Salient Risk Parity Index is up 19% this year, off a 12% loss in 2015.

This year’s positive performance for such funds follows a period last fall when some rivals blamed risk-parity funds for selling their portfolios all at once in a market swoon, exacerbating a downturn.

Mr. Dalio, who is credited with helping invent the risk-parity strategy decades ago, took the unusual step afterward of publicly defending the approach as a worthy long-term performer. He has indicated that the majority of his net worth is invested in Bridgewater’s risk-parity funds.
In January 2013, I openly asked whether the world's biggest hedge fund is in deep trouble, stating the following:
When I invested in Bridgewater over 13 years ago, it was just starting to garner serious institutional attention. Now, the whole world knows about Ray Dalio, Bob Prince and Bridgewater's approach. When I hear investors telling me investing in Bridgewater is a "no-brainer," I get very nervous and start thinking that the firm's success has become its worst enemy.

Let me be clear, I've met Ray Dalio, Bob Prince and many others from Bridgewater. There is no doubt they run a first-rate shop, striking the right balance, and deserve their place among the world's biggest and best hedge funds. But in this industry success is a double-edged sword and I don't like seeing hedge fund managers plastered all over news articles and engaging in silly deals.

Also, as I explained yesterday, there are good reasons to chop hedge fund fees in half, especially for these large quantitative CTAs and global macro funds. Why should Ray Dalio or anyone else managing over $100 billion get $2 billion in management fees? It's ridiculous and I think institutional investors should get together at their next ILPA meeting and have a serious discussion on fees for large hedge funds and private equity shops.

In my opinion, these large funds should charge no management fee (or negligible one of 25 basis points) and focus exclusively on performance. The "2 & 20" fee structure is fine for small, niche funds that have capacity constraints or funds just starting off and ramping up, but it's indefensible for funds managing billions as it transforms them into large, lazy asset gatherers, destroying alignment of interests with investors.

Now, one can argue that Bridgewater is becoming the next Pimco, a mega asset manager which successfully manages a lot more in assets. That's fine but then why charge 2 & 20?
Earlier this year, I criticized Bridgewater's radical transparency, stating the following:
[...] the bigger problem I have with this "radical" view of how people should interact in a company, especially a large hedge fund full of competitive individuals is on philosophical and ethical grounds. Let me explain. Ray Dalio may have mastered the machine but people aren't machines. His mechanistic/ deterministic view on markets and how the economy and world work cannot be translated into the way people should or can realistically interact with each other. 

In short, while you can code many relationships in the economy and financial markets, human interactions are far more complex. People aren't machines and when you try to impose some mechanistic deterministic view on how they should interact with each other (in order to control them?), you're bound to stifle creativity and breed contempt and an atmosphere of animosity, especially when the fund underperforms.

What else? I believe what ultimately matters is what Bridgewater employees are thinking and saying when the cameras and iPads are off or when they leave the shop. Bridgewater can tape all the meetings they want but Ray Dalio can't read minds and he doesn't know what is being said in private when employees are venting to each other or their partners at home (unless he's secretly taping them at the workplace and their homes, which is a sign of disrespect, not to mention it exhibits traits of a delusional paranoid tyrant).

Also, Gapper is right, there's an elitist (and narcissistic) air to all this. They hire a bunch of Ivy League kids and if after 18 months they manage to "get to the other side" of their emotions they then  become part of the Bridgewater "Navy SEALs," the select few who have mastered their emotions and are able to view things without their emotions getting in the way.

It's such nonsense and while it's great for marketing purposes, when the fund starts losing money, it exposes the shortcomings of this elitist mechanistic approach. Worse still, it leaves no room for real diversity at the workplace (how many people with disabilities does Bridgewater hire?) and you end up with a bunch of emotionally challenged robots at "the other end" who follow rules to conform to what their master wants, not because they truly believe or want to live by these ridiculous rules governing their every interaction.

Sure, Bridgewater is a great hedge fund, one of the best. But in my opinion, it's a victim of its success and it's gotten way too big and in order to control this explosive growth, they've implemented this 'radically transparent' cultural approach without properly thinking through what this entails or whether it stifles diversity, creativity, camaraderie and cooperation.  
As you can see, I hold nothing back when it comes to my thoughts and truth be told, I actually like Bridgewater a lot but I have zero tolerance for nonsense, especially when it comes from an elite hedge fund managing hundreds of billions of pension and sovereign wealth fund assets.

Of course, the news isn't all bad. After declining 6% last year, Bridgewater's All Weather Fund bounced back this year, but this has more to do with the fact that LDI and risk parity provided most shelter in Brexit storm:
Large weightings to fixed income helped LDI and risk-parity portfolios lost the least after dramatic movements in financial markets following the British “yes” vote on the referendum to leave the European Union. A LDI growth portfolio only fell 78 basis points. A risk-parity portfolio as measured by the Salient Risk Parity index, fell 107 basis points. A simple 90/10 or 60/40 portfolio of equities and fixed income and a risk-based growth portfolio had the greatest losses. The 90/10 portfolio fell more than 3%.

Is Bridgewater's Pure Alpha Fund in big trouble? Without doing a proper and intense due diligence, I don't know but it's definitely a sign that this mammoth hedge fund has gotten way too big.

In fact, Alexandra Stevenson and Matthew Goldstein of the New York Times report that Bridgewater is slowing its hiring:
After years of rapid internal growth, the world's biggest hedge fund appears to be slowing down.

The $154 billion hedge fund, Bridgewater Associates, run by the billionaire Ray Dalio, is known for hiring hundreds of people every year. Yet it is now telling recruitment firms to cancel interviews with prospective employees, according to three people briefed on the matter.

In recent weeks, dozens of interviews were canceled and advanced negotiations with prospective employees were cut short by the firm, those people said.

And some of the firm's external recruiters have been told Bridgewater will not use them for the time being, said the people, who were not authorized to discuss the matter publicly. Bridgewater emphasizes secrecy in its communication with investors and the external recruiting firms, and the people requested anonymity because they did not want their relationship with the firm to be affected.

It was unclear whether the suspension of recruiting in some areas was temporary or a reflection of a new push to gradually shrink the size of the firm. At the moment, there does not appear to be any talk of layoffs. The firm employs 1,500 people, most of them at its sprawling headquarters in Westport, Conn.

Still, the signs of a pullback in recruiting at Bridgewater are emerging at a time when a number of hedge funds, struggling with poor performance and unhappy investors, are starting to cut back. For example, William A. Ackman's $12 billion Pershing Square Capital Management, whose main fund is down 19.1 percent this year, recently fired a dozen employees.

The average hedge fund is up 1.6 percent this year through the end of June, according to the Hedge Fund Research Composite Index, the broadest gauge of hedge fund performance. By contrast, the Standard & Poor's 500-stock index is up 5.76 percent.

Bridgewater is not immune to the industry's pressures. It has had uneven performance in its two main portfolio funds, and at least one prominent investor has pulled out a significant sum of money over the last year.

The firm's flagship Pure Alpha fund, which makes broad bets on global economic trends, is down 8.8 percent, while its All Weather fund, which the firm contends will "perform well across all environments," is up 10.4 percent.

But last year, those performances were reversed: The All Weather fund lost investors 6.9 percent, while Pure Alpha gained 4.7 percent.

Over the last two years, the University of California's Board of Regents, the endowment for the state university system in California, has withdrawn the $550 million it had invested with Bridgewater.

Jagdeep Singh Bachher, the chief investment officer for the University of California regents, said in an interview that Bridgewater made money for the endowment, but that a decision was made to focus on investment strategies that would do best. He also said there were some concerns about the future direction of Bridgewater's leadership.

It has been a tumultuous year for the firm. Bridgewater publicly prides itself on what it calls "radical transparency" in its dealing with employees, but is very private about discussing its operations. The firm is in the process of reorganizing its core management committee that reports directly to Mr. Dalio, who founded Bridgewater in 1975.

This year, Greg Jensen, a co-chief investment officer who was seen as the heir apparent, was removed from his role as co-chief executive after reports of a schism between him and Mr. Dalio. Bridgewater hired Jon Rubinstein, a former Apple executive who had worked closely with Steven P. Jobs, to replace Mr. Jensen.

Bridgewater has publicly denied there were any internal rifts. The firm is known for its unusual culture, where employees are encouraged to question and sometimes admonish one another. Mr. Dalio encourages all employees to read "Principles," a little white book that each is given and that includes 210 motivational tips like, "Don't worry about looking good — worry about achieving your goals."

Publicly, the firm attributed the management shake-up to the need to "strike the right balance" for Mr. Jensen, who Bridgewater said was balancing too much as both co-chief executive and co-chief investment officer.

Mr. Dalio, who is 66, has created a core committee of managers that share top executive positions as part of a transition plan for when he retires. The firm has communicated to investors that the arrangement is part of a "planful transition from a founder-led boutique to a professionally managed institution."

Nevertheless, it has worried some investors.

"The management transition, in my view, it just didn't feel smooth," Mr. Bachher, of the University of California regents, said.

Despite the management transition and the apparent slowdown in hiring, Bridgewater continues to plan to expand its headquarters.

Connecticut has given Bridgewater $22 million in financial aid in an effort to keep the firm from moving its headquarters out of the state. The money is expected to go toward the expansion of Bridgewater's complex in Westport as well as its facilities in Wilton and Norwalk, according to the State Bond Commission.

Bridgewater recently received tentative approval from Westport town officials for its expansion plan, according to public documents filed in Westport's town hall. The plans would include the construction of an underground parking garage and another building at the Bridgewater campus at 1 Glendinning Place, the firm's headquarters tucked away in the woods and surrounded by streams.

It is accessible only by a nondescript road.
I agree with Jagdeep Singh Bachher, the former CIO of AIMCo who is now the CIO of the University of California regents, the management transition at Bridgewater just doesn't feel right.

Let me also publicly state this: I think Greg Jensen should leave Bridgewater to start his own global macro hedge fund and his seed investor should be none other than Ray Dalio.

This might sound odd but it will reassure investors and it will show the world that Ray Dalio isn't a power-hungry tyrant who needs to control all his employees through "radical transparency" or any other coercive means (if he had a fallout with Greg Jensen, he should send him off with the money he's owed and seed his new macro fund just like Soros did with his protege who enjoyed the biggest launch ever).

Like I said, I don't mince my words, and if you think I'm too critical of the world's biggest hedge fund, you should read the rest of this comment because unlike Bridgewater, the majority of hedge funds absolutely stink and should be shut down immediately.

Unsurprisingly, Bloomberg reports 84 percent of investors in hedge funds pulled money in the first half of the year, and 61 percent said they will probably make withdrawals later this year, according to a Credit Suisse Group AG study released Tuesday. The main driver among those who redeemed: their fund underperformed.

[Update: Fortune reports that in the first six months of the year, investors yanked roughly $600 million out of Bill Ackman's funds. The money, including $360 million in the second quarter alone, equals roughly 5% of the just over $12 billion Ackman’s Pershing Square manages, and about 30% of the money that could have left the fund since the beginning of the year under Ackman’s strict withdrawal rules. (Ackman’s previous firm closed after it was hit with a wave of withdrawals following poor performance in 2002.)]

Bloomberg also reports that Europe’s hedge-fund industry contracted for a sixth straight quarter and investors are starting to withdraw money from mediocre Asian hedge funds that charge high fees, a trend that’s forcing changes in the economics of the business, according to the global head of prime brokerage at Nomura Holdings Inc.:
“Organizations and investors don’t like to pay 2-and-20 when funds are not making money,” Nomura’s Christopher Antonelli said in an interview. “The big investors are forcing that change and they will continue to do that by starting to pull money. You don’t get any more money if you don’t change.”

Hedge funds charge the most among asset managers, traditionally raking in 2 percent in management fees and 20 percent of investment gains. They’re now seeing investors push back after many have failed to beat benchmarks amid volatile market conditions. Globally, 84 percent of investors in hedge funds pulled money in the first half of the year, with underperformance being the main driver of redemptions, according to a Credit Suisse Group AG study released Tuesday.

“With the new launches, we are seeing more varied fee structures and we will continue to see that,” Antonelli said.
You can forget about 2 & 20, it's dead, and the worst is yet to come for hedge funds because their day of reckoning still lingers as investors wake up and realize what a scam most hedge funds truly are.

What else? It astounds me to see hedge funds still partying despite huge losses. News Max Finance reports, Hedge-Fund Manager Fired Following Hamptons Party Gone Awry:
Moore Capital Management, the $15 billion hedge fund run by billionaire Louis Bacon, fired portfolio manager Brett Barna after reports about a party he hosted in the Hamptons in Long Island over the weekend.

“Mr. Barna’s personal judgment was inconsistent with the firm’s values," the firm said in an e-mailed statement. “He is no longer employed by Moore Capital Management.”

The New York Post reported on Wednesday that Barna hosted a pool-party fundraiser for an animal rescue charity at a rented $20 million mansion in Bridgehampton on Sunday. Barna had said there would be 50 guests, but 1,000 showed up, the newspaper said, citing the owner, who asked not to be identified. They drank excessively, damaged furniture and stole art work, the owner told the Post.

Barna didn’t respond to phone calls or e-mailed requests for comment. He’d been with the New York-based firm for more than six years.
A couple of points here. First, after reading the New York Post article, even if there was sauce added with salacious details, in my opinion, Moore Capital did the right thing to terminate Brett Barna's employment (not that they had much of a choice).

Second, even though Barna has come out to say the party was "good clean fun", I don't know what he was thinking throwing such an outrageous party where people armed with cell phones can use their Twitter, Facebook and Instagram accounts to broadcast live what is going on there.

Not too bright. My suggestion to Mr. Barna is to take a big chunk of his severance package from Moore Capital and donate it to an organization in New York City which feeds desperately poor and hungry people, including many kids that go to school hungry. He and his over-privileged Hampton buddies partying like drunken adolescents should also volunteer at least one month of their time to feed people in a soup kitchen or homeless shelter to see real world struggles.

I better stop because I sound like a self-righteous jerk and I don't want to beat on a man after he was fired but some of these people in Hedge Fundistan need a reality check and they need to start acting more their age and realize they represent an organization even when off duty.

Below, I embedded a few clips related to this comment. First, Bridgewater Associates, the $154-billion hedge fund run by Ray Dalio, is telling recruitment firms to cancel interviews with potential employees.

Second, Robert Leonard, global head of capital services at Credit Suisse, discusses a survey which polled more than 200 allocators with almost $700 billion invested in hedge funds. He explains why many investors are cutting allocations to underpeformers and moving into strategies and funds which are performing.

Third, CNBC's Robert Frank reports on the party at a rented mansion in the Hamptons which reportedly left it in shambles and got Barna banned from Airbnb.

After being fired following a raucous fundraiser that went viral in the Hamptons, Brett Barna, former Moore Capital Management portfolio manager, spoke out about the event with CNBC's Kelly Evans (fourth clip).

I also embedded a short clip of the party which was posted in the New York Post article. "Good clean fun"? Looks like Barna and his guests were trying to recreate Mykonos at the Hamptons (no wonder the Hamptons housing market is crashing).

Lastly, whenever I hear about guys called Brett, Brad, Brent, Kyle or Tucker partying up like adolescents in the Hamptons, it reminds me of that classic George Carlin skit on guys named Todd.

Hope you enjoyed this comment and remember, while hedge funds are charging you 2 & 20 for mediocre returns, my comments are absolutely free so please join premiere pension funds who support this blog and subscribe and/ or donate on the top right-hand side under my picture.







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