why aren't hedge funds doing better?
this has been an awesome year for lots of thematic stocks (quantum, nuclear, ai, rockets) with many stocks like sym, oklo, qbts, open up 100-500%.
why aren't hfs taking advantage of these opps? never hear of any funds who are up 50-100% on these stocks, even the tech heavy tiger funds who are mostly large cap tech which has lagged the speculative stocks. hell, qubt is up 25% today on no news so its pretty easy times
feels disappointing as they were mostly retail heavy names and lot of institutionals dismissed them because of accounting issues, no revenue, or other dogmatic reasons that turned out to no matter
Hedge funds' underperformance in such scenarios can be attributed to several factors, as highlighted in previous WSO discussions:
Focus on Risk-Adjusted Returns: Hedge funds are designed to prioritize risk-adjusted returns rather than chasing speculative, high-volatility stocks. Many funds aim for consistent performance across market cycles, which often means avoiding highly speculative names like SYM, OKLO, or QBTS that lack revenue or have accounting concerns.
Institutional Constraints: Many institutional investors and hedge funds have mandates or risk parameters that prevent them from investing in speculative or pre-revenue companies. These constraints can lead to missed opportunities in high-growth, retail-driven stocks.
Dogmatic Investment Approaches: As you mentioned, institutional investors often dismiss speculative stocks due to traditional valuation metrics or concerns about fundamentals. This dogmatic approach can cause them to overlook opportunities that retail investors capitalize on.
Market Dynamics and Strategy: Hedge funds often focus on large-cap, liquid names or sectors where they can deploy significant capital without moving the market. Speculative stocks, which are often retail-heavy, may not align with their strategies or liquidity requirements.
Challenges in Stock Picking: Picking individual stocks consistently is extremely difficult, even for hedge funds. As noted in WSO threads, many funds struggle to generate alpha in a market where high-speed trading and other factors have eroded traditional short-term information advantages.
Bull Market Dynamics: Hedge funds tend to underperform in strong bull markets, as their strategies are often designed to hedge against downside risk. Retail investors, on the other hand, may take on more risk and benefit disproportionately from speculative rallies.
In summary, while retail investors have thrived in speculative names this year, hedge funds' structural and strategic limitations, combined with their focus on risk management, have likely kept them from fully capitalizing on these opportunities.
Sources: Why are previously successful hedge funds failing?, It's getting ugly out there - Baly to cut 13 stock teams, Is value investing dead?, Explain to me like I'm a 12 year old the benefit of a hedge fund
p sure a bunch of single manager directional funds are up 30 - 50pct this year being long tech? so dont think ur premise is right
Who is up 50? Most tech funds are up 15-20. Quantum and OKLO is up 100%+ and no fund is up over 100% that I know of
Odd question coming from a PM which you definitely are. But they aren’t doing better because they need to deliver risk adjusted return.
No, the stocks have had less vol than lots of other consumer and tech names. Eg lots of stocks down 30% on missing earnings by a slight amount. Not case for quantum and AI names, so they have been less risky if anything
Thats just not true. Go back to June and look at their vol it was crazy.
Quantum is a trend (no real world impact) a lot of companies, such as Intel, shut down their quantum efforts because they just see it as throwing money at something that won't be ready for another 5 years and also just wont contribute to anything. All the quantum stocks that are doing well (QUBT, dwave, RGTI) are all GME type stocks. One of them used to be a beverage company. They don't have any product. As for why no funds are in them, partly because they are worried about another GME-type run. Most funds would be short these stocks btw def not longs.
Response is Perfect example of investors being dogmatic and missing forest for trees. Focusing on nitty gritty of product and financials, while misunderstanding that retail investors love big themes, mkt caps are small, and there is no earnings risk. Perfect cocktail for long to explode higher while “cheap” stocks are trading weak because the story isn’t there
There is a reason 0 PMs have put on this trade. Again 100% would be short quantum. Its a meme rally. So was cannabis, 3D printing, Solar in 2020, etc.
You must be a PM of your own robinhood portfolio, with a flexible risk mandate.
Your argument that a hedge funds performance should match the returns of one of these stocks presupposes that 100% of their book is concentrated said positions, and no shop allocates that much to a single company.
For L/S shops, makes sense that their total returns aren’t that high given that they hedge with short positions.
For LOs—that can capitalize off directional movements—bold of you to assume that their books are compromised of 4 AI and quantum computing stocks
How are people managing short books in this mkt? Lots of stupid and irrational moves
I’m not too sure since I’m just a student but I’d assume that shops w a dedicated short bias still follow the same play book and short based on accounting fraud/scandals. For L/S, I don’t think the central ethos behind shorts is predicated on the current bubble popping, but probably intrasector shorts to isolate a long idio bet.
Sure, the recent market moves have been pretty crazy and irrational, but there’s no limit to how irrational investors can be, and these crazy swings can easily force a margin call and fuck you over.
Chanos is doing smth interesting though I think he’s shorting MSTR and long BTC because he thinks the crypto >1 mNAV bubble will pop
Half the stuff you posted out performing were recommendations from my buddy that is an alcoholic and has zero training in anything related to finance. Just something to think about in terms of what is driving the market.
he has outperformed everyone... shows how the professionals sometimes suck and retail is smart. have to be commercial and trade mkt in front of you instead of focusing on fundies too much to make $
“TrAdE da MarKeT in fR0nT of YoU”
lol shut the fuck up, intern. You’ve never traded jack shit and it really shows. This might shock you, but hedge funds aren’t run like r/wallstreetbets and simply nobody cares if meme names have had a good run in the last 3-6 months. Plenty of ways to make sustainable money that your monkey brain isn’t able to understand or process.
Some smaller SMs r up huge over last 2 years.
Someone explain to this retard the difference between alpha and beta and what risk adjusted returns are
too much cope/seethe in this thread. even today, names like ionq/oklo up while market is down. shows value of buying thematic names instead of whats cheap or "good business"
And I was the one who thought the bar for getting in this industry was high.
lots of LARPers in the comment section. Also, the fact that the average tenure of HF analysts is less than 3 years. If you are not trading quantum names, what else are you trading for alpha? Are you just gonna focus on idio names every quarter if you ain't LO
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