Another Shakeout in Hedge Funds?
Fortress Investment Group LLC and Bain Capital are leading the list of big-name money managers liquidating hedge funds this year as volatility roils global markets.In September 2008, I warned my readers that the shakeout in the hedge fund industry will be brutal. Last December I wrote all about hedge funds closing like it's 2009.
Hedge funds with more than $16 billion have announced shutdowns so far in 2015, according to data compiled by Bloomberg. Fortress said Tuesday it’s closing its $2.3 billion macro business run by Michael Novogratz after posting losses for almost two years. Bain said last week it’s shuttering its macro fund, which sustained more than three years of declines.
“There’s an inherent flaw in the hedge fund business model,” said Sam Won, founder of Global Risk Management Advisors, which advises hedge funds and investors. “A lot of investment themes for hedge funds are of a longer tenor than the investor is committed to the fund.”
Hedge fund managers, among the highest-paid investors on Wall street, have struggled to navigate markets rattled by the Swiss franc’s unexpected surge in January, the devaluation of the Chinese yuan in August, or this year’s declines in oil and gold prices. It hasn’t been all bad news for the industry: Funds averaged a 0.7 percent return in 2015 through September, according to Bloomberg data, compared with a loss of 6.6 percent for global stocks.
Fortress closed its macro business as trades including the Swiss franc and the Brazilian real went awry.
‘Added Stress’
“After asking myself the simple question, ‘Is the environment we are operating in conducive to achieving our best results?’ the decision became easier,” Novogratz wrote Tuesday in a letter to clients. “We have reached a point where the added stress of an underperforming fund has become unproductive.”
The large-scale closures started with Comac Capital, the London-based manager run by Colm O’Shea, who shut his $1.2 billion firm in January after losses on the Swiss franc. Two months later, a pair of funds backed by billionaire investor Julian Robertson, TigerShark Management and Tiger Consumer Management, told clients they were shuttering.
Meredith Whitney, who turned fame as a banking analyst into a stint running her own hedge fund, said in June that she had returned money to clients after less than two years and was done with the industry. Incapture, an investment and technology firm backed by former Barclays Plc Chief Executive Officer Bob Diamond, said in August it was closing its sole fund.
“We’re seeing persistent back-to-back negative performance by some of the biggest names,” said Peter Rup, chief investment officer at New York-based Artemis Wealth Advisors LLC, which invests $400 million of client money in hedge funds. Central bank stimulus has had a “perverse effect on the minds of managers, convincing them that they can generate profits just by being long,” he said.
China’s Growth
Some 417 hedge funds announced shutdowns in the first half, according to Hedge Fund Research Inc. While that number isn’t on track to surpass the 864 funds that closed in 2014, the market turbulence of the last two months caused by concerns about China’s slowing economic growth could lead to a pickup in the fourth quarter.
A record 1,471 funds liquidated amid the 2008 financial crisis.
Some of the biggest names that remain in business are having a hard time, reminiscent of the 2008 slump that saw the industry post record losses and clients pull more than $150 billion. Funds run by David Einhorn and Bill Ackman are among those in the red, while Michael Platt and Sean Fahey are managing less than a third of the assets that they oversaw at their peaks.
None of this will shock sophisticated institutional investors like Ontario Teachers' Pension Plan which has been investing in hedge funds for over a decade. OTPP's leader, Ron Mock, set up the external absolute return program at that organization and he knows all about the perils of investing in hedge funds.
If you talk to a guy like Ron, he will tell you just how hard it is to invest in hedge funds in this brutal environment and why there are going to be many more closing their doors in the future. This is why the folks at Ontario Teachers' are very active in monitoring their sizable hedge fund investments and are not shy about redeeming if they see problems ahead (they don't wait three years to pull the plug!). The team is now led by Wayne Kozun who is responsible for Teachers' Fixed Income and Global Hedge Fund portfolio (another great guy who knows his stuff).
But for every Ron Mock and Wayne Kozun, there are thousands of other investors who really don't know what they are doing in hedge funds, follow the pack listening to their useless investment consultants which typically shove them in the hottest hedge funds they should be avoiding. This is why most investors consistently lose money on hedge funds, especially after you factor in the fees and illiquid nature of these investments.
When you look at the beating some of the brand name hedge funds took this summer which they won't recover from, you have to wonder whether this entire industry is a fool's paradise. If you are skeptical too, you're not alone. Bill Gross and Warren Buffett have called out hedge funds and slammed their performance and fee structure (note however that Wal Mart's woes are slamming Buffett's portfolio hard).
I know, the biggest and the best hedge funds will continue to prosper as U.S. public pension funds chase their rate-of-return fantasy. The game is rigged in favor of the very large hedge funds which is why the top 100 manage close to 90% of the industry's total assets.
However, in this environment, I would beware of large hedge funds and start focusing my attention on some of the smaller ones that are far from perfect but tend to have better alignment of interests.
In fact, investors continue to experience hedge fund headaches, complaining that returns have missed expectations, fees are too high, and they don’t think their interests are aligned with those of fund managers. The result: A third of investors will commit less money to hedge funds over the next 12 months, versus 19% of investors asked the same question last year, according to alternatives tracker Preqin.
If you ask me, most of these investors have no business whatsoever investing in hedge funds and are better off following CalPERS which effectively nuked its hedge fund program. Of course they won't and will instead listen to their lousy consultants who are going to make a nice PowerPoint presentation on why investing in hedge funds is an intelligent way to manage downside risks (insert roll eyes here).
Folks, "it's all bullshit and it's bad for you." I guarantee you three or five years down the road, we are going to be discussing the lousy performance of hedge funds and how many are closing their doors. There is no end of the deflation supercycle and it will be a brutal environment for hedge funds and other alternative asset managers.
I know, the same can be said of mutual funds which are now getting into the hedging business but at least they won't charge outrageous fees for their underperformance. On the flip side, U.S. stock correlations have collapsed to the lowest level since 2007 and this is good news for all active managers (we'll see how long this lasts).
"Leo, you sound like such a cynical prick on hedge funds!" You better believe it, I've seen so much bullshit in the hedge fund industry and I didn't even have to work long investing in them to see how most institutions don't have a clue of what they're doing in their hedge fund program. Now, I can just sit back, poke fun at the industry, and write about hedge fund bombs exploding everywhere, ripping their unsuspecting investors apart.
Below, CNBC’s Kate Kelly reports on the shock of Fortress Investment Group (FIG) shocking Wall Street by shutting down its biggest hedge fund. I'm not shocked and expect to see more high profile hedge fund closures in the future and of course, more pathetic and lame excuses blaming their lousy performance on evil central bankers trying to save their world.
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