How Do Hedge Fund "Geniuses" Einhorn and Ackman Still Have Any AUM?
So hedge fund "genius" David Einhorn is down 18 percent this year, even though the S&P is up 5 percent.
Last year, his fund gained 2 percent while the S&P gained 22 percent. He slightly underperformed the market in 2016, while getting crushed in 2015 when he LOST 20 percent while the S&P gained 1 percent.
Same thing with Ackman. Through June 5, his Pershing Square hedge fund had returned 7.5 percent for 2018, handily beating the S&P 500’s 3 percent gain. But this is the same guy who:
o Lost 20.5% in 2015 when the S&P gained 1 percent.
o Lost 13.5% in 2016 when the S&P gained 12 percent
o Lost 4% in 2017 when the S&P gained 22 percent.
So over the last 3 years, while the S&P was up more than 34%, Ackman lost his investors 38 percent… and he’s still got 8 billion under management!
Why are these guys still considered the "smart money?" And if you had millions to invest, why the hell wouldn't you just put it in a Vanguard Index fund instead of with them?
I too have wondered this for quite some time.. TBH maybe it is because I do not know better, but I just can't seem to understand why millionaires would put money into a hedgefund at this point in time. It has been proven time and time again that long-term they do not beat the market. 2% in last years market? That should be illegal.
Millionaires who made their money in something simple like, say, a catering business, are dazzled by MIT engineers and Harvard MBAs using terms like "sharpe ratio" and "stochastic."
Finance just isn't that complicated...
These funds have clauses that limit the rate at which you can redeem (10% per quarter, as an arbitrary example), and as Armada pointed out above me I'm sure they're hemorrhaging capital. It's only a matter of time before their short term track record is going to make it impossible to attract new money and net flows will bleed them dry. You can only say "Yeah but look at our record from '04 to '09" for so long before people tell you to kick rocks.
So uhh not that I have any specific opinion about Ackman or Einhorn but hedge funds are not really supposed to be benchmarked to the SP500... Hedge Funds are intended to be an alternative source of return that is uncorrelated to the overall market. Comparing the returns of hedge fund managers and the overall market during individual years makes very little sense.
The reason that people don't put all their money in a vanguard index fund is that is risky in itself! Being overexposed to the stock market is not considered a good thing by any serious investor. Nobody is putting their entire fortune or their entire pension fund into a hedge fund.
People mostly allocate portions of their portfolio to hedge funds, believe it or not, as protection against big market downturns. On an annualized return basis, both Einhorn and Ackman have done quite well. Looking at the returns of hedge funds vs the overall market for a few recent cherry picked years is not how anyone who knows what they are doing selects managers.
While this is true, no one is investing their money in HFs to underperform the S&P.
Yes! This is what I am talking about. To consistently underperform the market average -- and by large amounts -- simply wouldn't be acceptable to me as an investor... especially if I'm paying the 2 or 3 percent in annual fees vs. 1/10 of a percent in an index fund.
This is just not true. At all. Have you ever worked with anyone from a FoF? Everyone knows hedge funds underperform the S&P on a return basis. Hedge Funds have higher sharpe ratios than the S&P. That's why people invest in them.
No, it's actually not even true. If you mean hedge fund in a literal sense as an investment fund which attempts to take a net market neutral position, then yes DeepLearning is correct.
However, if you're invested in a hedge fund that for example has a tech focus and is net long tech stocks. You get killed along with the rest of the market if it goes south...
Hedge funds these days take all sorts of positions at any given time. Net long, net short, neutral. In fact, if the fund is positioned the wrong way, you could be losing MORE than the S&P in a downturn.
Furthermore, if the fund in question is not following some sort of market neutral strategy, it is more than fair to compare their returns to things like the S&P.
I fully understand you shouldn't benchmark hedge funds to the S&P. This said, in the '16-'18 market where you could literally throw a dart and pick a winner, how do you say to investors "look guys, I understand the market is up 20+% and we're down 5%, but you have to understand that we're a non-correlated asset class designed to cushion your overall portfolio on the downside." I'm not expecting outperformance during bull markets because I'm paying for that downside protection, but at what level of underperformance do you say enough is enough, literally holding cash is a better risk adjusted return than being in this fund. Hyperbole obviously but you get my point. Partly playing devil's advocate but mostly just unsure of the objectives/mindset of investors.
Could not agree more. I wouldn't be paying these guys to hedge against the market... I would be paying them to, the vast majority of the time, beat the market; they're supposed to be able to be better than most at making educated guesses regarding which way the market is heading.
Right, that's fine. Most investors are in it for the long haul. But the benchmark that institutional investors look at when it comes to HFs is cash/3m T-bills. Again, I have no specific opinion about Einhorn or Ackman and if they do continue to severely lose money like this, they will probably have to shut down. But they could very easily pick back up. Different macro environments are suitable to different investing styles.
"Beating the market" for hedge funds is not beating the S&P. If you are dollar neutral or market neutral, your benchmark is cash or treasury bills. Hedge Funds are not intended in ANY way to be a replacement for stocks. They're actually intended to be more of a replacement for fixed income than anything else. That's how institutional asset allocators look at HFs.
This is so stupid it's unreal. Their shit returns are shit on a risk-adjusted and on an absolute basis. Their losses are the result of bad decisions, plain and simple. It has nothing to do with beta. People don't pay asset managers to make objectively wrong investment decisions.
This has to stop. So many HF apologists. If you said this on a job interview you'd be laughed out of the building. Unreal that this is the highest rated comment.
It has everything to do with beta. You clearly do not know very much about the role that hedge funds play from an asset allocation perspective. Nobody is denying that Ackman and Einhorn have had shit returns in the last couple years. On an annualized basis over the course of 15+ years, however, they have been excellent.
How do you define a "wrong" decision? If every sector in the SP500 is up and you don't end up shorting the 5 stocks that were overall down in 2017, did you make a "wrong" decision? No. If your longs outperform your shorts you generated alpha and did your job as a hedge fund.
It's funny because if you talked about benchmarking hedge funds to a long only index, that's what would get you laughed out of the building. Another poster already copied and pasted this but for the love of god, please read this. Cliff Asness is a much smarter guy than me and explains it well.
https://www.aqr.com/Insights/Perspectives/The-Hedgie-in-Winter
From https://www.aqr.com/Insights/Perspectives/The-Hedgie-in-Winter</a">The Hedgie in Winter by Cliff Asness:
"Comparing hedge funds to 100% equities is flat-out silly. Hedge funds have historically, rather consistently, delivered equity exposure (beta to my fellow geeks) just under 50%. In fact much of their point is, supposedly, to be different from equities. I mean that they are at least partly hedged investments. Put more bluntly, it is in the freaking name!"
"Over the full 20+ year sample, hedge funds have handily outperformed their exposure to the market (that is, the blue line ends substantially positive)."
"Conclusion
The reason to worry about hedge funds is decidedly and emphatically not that they’ve failed to keep up with 100% long stocks in a nine-year bull market. That was utterly predictable given a strong bull market. The legion of commentators effectively making this fallacious argument must now stop. I’m absolutely convinced that since I’ve finally explained it so clearly this time that they finally will cease.
But all is not well, and winter may indeed have come to hedge funds. The reason to worry is the evidence, from both their realized excess (vs. their positive beta) returns and, importantly, their correlations to traditional active stock picking, that hedge funds no longer are what they once were. There are no proofs above, just stories and supportive data. But I find the story that hedge funds as a whole are now much closer to regular old traditional active stock picking, and thus less special than before, quite plausible. Given traditional active stock picking is such a consistent long-term disappointment, this ain’t good."
http://www.priceactionlab.com/Blog/2018/06/passive-investors-drawdown/</a">Source:
"Passive investing would be in trouble had central bankers not decided to directly intervene in equity markets after the financial crisis. Passive investing is a scheme where an investor and a fund management firm both profit without doing anything related to market timing. This induces moral hazard as more investors want large returns by going passive and more fund managers realize large fees while not taking any forecasting risks. If markets fall, they can always blame the economy and the government but not themselves. A more serious side effect of passive investing is that both good and bad companies are rewarded by passive investors and that creates economic excesses that must be painfully removed at some point in time.
As the passive investing trade gets crowded, risks increase. The more people that park their money waiting for returns, the larger the market drop will be next time there is an unpredictable event, as most of these investors usually pick bottoms to get out instead of tops. Few passive investors have the discipline of staying invested along corrections and much fewer engage in bargain hunting near bottoms. Most investors want to get out when a sharp decline occurs in fear of losing everything."
"This chart is even uglier than it looks. A Monte Carlo simulation based on equity curve changes in the daily timeframe generated the following cumulative distribution of maximum drawdown.
"There is 50% probability (loosely speaking) that the drawdown will be larger than 45%. There is probability of about 15% for a drawdown of 60% or larger. This is not an easy ride as seeing a passive investment in S&P 500 losing half of its value is a coin toss based on past history and assuming it is a guide for the future."
cc: DeepLearning
Agree with Cliff here.
"The reason to worry about hedge funds is decidedly and emphatically not that they've failed to keep up with 100% long stocks in a nine-year bull market. That was utterly predictable given a strong bull market. The legion of commentators effectively making this fallacious argument must now stop."
This is retarded.
If it was UTTERLY predictable, why would anyone stick money in a hedge fund? If it was predictable than there was zero risk, and the "risk adjusted" reason for using a hedge fund holds no water.
And I'm sorry, but losing to the S&P for A FULL DECADE is inexcusable.
Seriously, who buys what these guys are selling? I swear the quant HF space is full of iq 145+ people with zero common sense.