Worse Hedge Fund Performance Ever
Here is a short guest post from a fellow financial blogger:
It appears hedge funds had a disastrous September, the worst since records have been kept (1990). Some of the names on the list are quite shocking as they are considered "the best of the best". The whole idea of a hedge fund is to offset market volatility and be able to make money in both and up and down market (or at least limit losses) - or at least that was the old school idea of what a hedge fund offers. The new school idea is to take as much risk, lever as much as possible, and create generational wealth in a span of 2-3 years and then if the fund blows up, oh well. You start a new one in 18 months and say "well who could expect what happened to happened - it blew up my model".
Now I will say there have been some things that have worked against hedge funds of late
1. many long-short funds, and many quant funds got the rug pulled out from under them with the short sale restrictions in financials, and many hedge fund strategies won't work if the rules are constantly changed - as they have been.
2. the day to day volatility as we've pointed out here is simply unfathomable - 4% days have become the norm.
3. there is no memory from 1 day to the next - it is impossible to make money when no trend lasts for more than 48 hours.
4. naked shorting has finally been enforced - this was stealing candy from a baby for many hedge funds as they could sit and effectively attack smaller companies day after day for as long as they want. The investment brokers, serving as prime brokers for the hedgies, of course were laughing it up too - more profits for all of us!... until the day the tables turned on them and the i-banks become the targets. Then the last 2 i-banks standing ran to Washington D.C. and screamed to CHANGE THE RULES since naked shorting is UNFAIR and the Frankensteins they helped create had turned on them. It is the height of hypocrisy. But without naked shorting the "easy trade" has been taken away from some of these hedge funds. Gaming the system is not really showing any investing acumen - it is simply skirting the rules - I hope this becomes a permanent change and we allow smaller companies to actually enjoy an existence in the stock market.
I think this era is going to show a lot of institutions who threw gobs of money at hedge funds based on "models" to rethink the situation. And just from a lot of what I read on the internet many individual investors seem to think of these hedge funds as magical entities who are above it all and can mint money like magic - well those perceptions will also be going bye bye. As I've been saying this very fat herd full of "me too" hedge funds is going to be thinned substantially in the months and year to come. Hopefully old fashioned stock picking (both long and short) makes a comeback - you know picking stocks with good prospects to go up, and vice versa? Instead of having 450 super computers from this fund battling 980 super computers from that fund? I'm a traditionalist I guess.
* Maverick Capital Ltd., Greenlight Capital LLC and The Children's Investment Fund Management LLP fell more than 12 percent in September as stock hedge funds posted record monthly losses and braced for client defections.
* Lee Ainslie's Maverick Capital declined 19.5 percent and Greenlight Capital, run by David Einhorn, was down 12.8 percent, according to investors in the New York-based funds. Children's Investment, overseen by Chris Hohn in London, fell 15 percent, based on a preliminary estimate. (Maverick is very well respected and to lose 1/5th of value in 30 days is simply unfathomable; Einhorn has become a CNBC star)
* Other managers with above-average losses for the month included Stephen Mandel, whose main Lone Cyprus fund in Greenwich, Connecticut, fell 14.7 percent. New York-based Third Point LLC, run by Daniel Loeb, dropped 11 percent.
* Stock hedge funds fell an average of 8.6 percent in September, the biggest one-month loss since Hedge Fund Research Inc. began collecting data in 1990. While that was better than the 12 percent decline by the MSCI World Index, a benchmark for global stocks, industry analysts expect investors to increase their requests to pull money from funds.
* The losses came even as many managers sought to sidestep the tumble in equity prices by holding more cash, cutting borrowing and reducing their bets on stocks expected to rise.
* Restrictions on shorting stocks in the U.S. and U.K. put in place on Sept. 18 hamstrung funds that could no longer bet on falling prices of 15 percent of the companies in the Standard & Poor's 500 Index. Energy and materials shares, which many hedge funds had been expecting to rise, were some of the worst performers in the month, with the S&P 500 Materials Index down 17 percent and its Energy Index down 12 percent.
* Price swings also made trading difficult, investors said. The S&P 500 rose or fell more than 4 percent on six trading days in the month, compared with once in the previous eight months.
* Managers including DKR Capital Partners LP in Stamford, Connecticut, and London-based RAB Capital Plc restricted redemptions on some funds so they aren't forced to sell assets at a loss to pay off investors. RAB Special Situations, down 15 percent in September and more than half this year, won investor approval on Sept. 30 to delay redemptions for three years in return for a cut in fees. DKR SoundShore Oasis Fund restricted redemptions after it received requests for withdrawals totaling 27 percent of its net asset value. Guy Wyser-Pratte suspended withdrawals from his $500 million Wyser-Pratte Eurovalue Fund.
* The month was the worst in 19 years for a basket of 50 stocks that are widely held by hedge funds, according to Goldman Sachs Group Inc.'s Very Important Positions index. The index fell 18.6 percent in September, the most since data have been tracked, and 24 percent year-to-date. The index is compiled of the positions that appear most frequently among top 10 holdings of hedge funds. (that's forced liquidation after forced liquidation - and its a spiraling effect)
Here is the scary stat (well the whole story is scary)
* Funds of hedge funds probably put in more than $100 billion in year-end redemption notices by this week's Sept. 30 redemption deadline, according to London-based advisory firm Clontarf Capital.
So depending on the leverage in the hedge fund system, multiple $100 Billion x (amount of leverage in those hedge funds) and that's how much selling could potentially go on in the 4th quarter to meet redemption requests. This is why I don't expect much sustained sucess to the upside in markets in the fourth quarter, although I'd be happy to be wrong.
Hopefully by Dec 31st a lot of smaller to medium funds have closed up shop, exited positions, and we can carry some semblence of normalcy beginning Jan 1. But I'd love to be a fly on the wall at some of these offices as the "brightest and best" explain to their investors how a "hedge(d)" fund could perform quite so poorly.
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