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?

Comments (124)

Aug 1, 2018

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.

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Aug 16, 2018

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...

Aug 1, 2018

From what I've read, Ackman's fund is suffering huge outflows at the moment because of his failed crusade against Herbalife. It all catches up to you eventually.

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Aug 1, 2018
Armadapk:

From what I've read, Ackman's fund is suffering huge outflows at the moment because of his failed crusade against Herbalife. It all catches up to you eventually.

Herbalife
Target
JCPenney
Plus others that are not in the headlines

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Aug 16, 2018

Don't forget Valeant (loss $4bn)

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Aug 1, 2018

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.

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Aug 1, 2018

They will wind down the fund and raise capital for a new one. Rinse and repeat. People have very short term memory.

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Aug 1, 2018

Do you really think a cap raise on a scale that they saw on fund inception is going to be possible after their last few years coupled with an outlook toward negatively shifting flows moving forward? Not disagreeing with your prediction, more curious on how you see their potential success taking on new money.

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Aug 1, 2018

I think rich people view it as a status symbol: "Look at me, I am with Ackman and Einhorn." They think it makes them look like smart investors, but in reality, at least lately, it's made them look pretty foolish.

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Most Helpful
Aug 1, 2018

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.

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Funniest
Aug 1, 2018

While this is true, no one is investing their money in HFs to underperform the S&P.

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Aug 1, 2018

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.

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Aug 1, 2018
MMBanker14:

While this is true, no one is investing their money in HFs to underperform the S&P.

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.

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Aug 2, 2018

Hedge funds are, by nature, not designed to outperform the market using the market as its benchmark. They are meant to "hedge" out market risk to isolate some factor and therefore have very low correlations to traditional markets and provide an absolute return (say, LIBOR + 4% annually) every year rather than outperform some index. It's better to look at Sharpe/Sortino ratios (historical risk/return) than performance relative to something like the S&P500 (equity) or Barclays Aggregate (FI)

They're minerals, Marie!

Aug 9, 2018

Luddite. You should do some reading on separating beta and alpha and the importance of diversification. Here's a good start: https://www.bridgewater.com/resources/engineering-...

Aug 9, 2018

This isn't true at all especially in a bull market. They are fine underperforming as long as their beta is lower or ideally 0 beta.

That being said these funds are not 0 beta. And furthermore they are doing very stupid trades.

Herbalife was a stupid trade....brontecapital did real time analysis that destroyed his thesis. I made money trading against him. Icahn made money against him. He had negative edge on the trade.

Einhorn been an idiot shorting fang. I mean I have no problem shorting Tesla as they have real issues. But shorting fb amazon google is only shorting companies on valuation (and their valuation isn't ridiculous).

A truly market neutral fund doesn't need to beat the snp to be a useful investment. Bonds don't beat the snp and people own them.

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Aug 16, 2018

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.

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Aug 1, 2018

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.

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Aug 1, 2018

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.

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Aug 1, 2018
LeveredBetaBoy:

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.

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.

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Aug 1, 2018

I wasn't implying that people should put ALL of their money in an index fund. What I meant was, for the money that people have earmarked for stocks, it seems like these billionaire hedge fund guys don't give you much of a chance of consistently beating the market. If you want a hedge against market going down -- depending on your age, of course -- put 50-80 percent of your money in an index fund and put the rest in cash... this way, if market goes down, you have 20-50 percent of your portfolio that wasn't creamed by a bear market and can then be deployed to buy stocks at lower prices.

Aug 1, 2018
MichaelScarn:

I wasn't implying that people should put ALL of their money in an index fund. What I meant was, for the money that people have earmarked for stocks, it seems like these billionaire hedge fund guys don't give you much of a chance of consistently beating the market. If you want a hedge against market going down -- depending on your age, of course -- put 50-80 percent of your money in an index fund and put the rest in cash... this way, if market goes down, you have 20-50 percent of your portfolio that wasn't creamed by a bear market and can then be deployed to buy stocks at lower prices.

"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.

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Aug 20, 2018

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.

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Aug 20, 2018
Esuric:

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-Hedg...

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Aug 1, 2018

Have you taken a look at how some hedge funds have done when the S&P 500 has crashed and compared the two? HFs lost a lot less than someone who placed all of their eggs in one basket and that's the value of hedge funds. They help investors diversify.

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Aug 1, 2018

Are we really on a finance forum and complaining about alpha that hedge funds generate? Like another poster pointed out...generating returns that behave like the s&p500 is not the point of a hedge fund.

Aug 9, 2018

For overall hedge funds you are correct.

For Einhorn and Ackman they are stock pickers. So performing with snp is their job. Those two are not taking away market risks...their funds are meant to pick better stocks.

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Aug 2, 2018

Pershing has a listed vehicle that he raised in his better days. If you read the prospectus you'll see that they implemented a smart draw-down structure. Some guys have long lock-ups and family / wealthy friends usually withdraw last. Once lock-up periods expire, outflows start and given the performance there will not be any inflows unless they raise a new "strategy" fund with a different title. To be frank, institutional money (insurances etc) is not the smartest capital, so guys like DE and BA will always attract some capital.

Aug 2, 2018

It's a fair question, but at the risk of sounding like a dick, the word hedge is in the name, what's the confusion here ( I assume it has something to do with the youthful naivety of some of this site's users, which is fine). It's a piece of the investment portfolio pie, you're not parking your entire life savings there hoping for an early retirement.

It's basically Blackjack insurance.

Aug 3, 2018

What's the outlook for analysts who work for these firms that have suffered from performance/outflows? Would something like that be held against them during recruiting or would the fund name still carry weight?

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Aug 21, 2018

Big name is a positive regardless. At funds like these analysts don't make decisions anyways, they analyze. The fact that they could get those jobs speaks more to talent than the fact that the funds sucked.

Completely different story if you worked for some small fund that got killed

Aug 6, 2018

I feel like an investment in a hedge fund is all about taking lots of small losses and a few large gains.... whereas more mainstream forms of investment are about taking lots of small gains and a few large losses. Positive skew vs. negative skew in statistics terms.

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Aug 9, 2018

Really? The average investor taking a few large losses? Maybe. Of course, losses on a particular stock can be limited with a stop-loss order.

Aug 9, 2018

I'm saying in general that's the objective of a hedge fund and its value proposition to the markets.

In regards to stop-losses, who do you know that slaps stop losses on each position everyday? You would have to have a hell of an advisor and trading team behind you, especially if you have institutional sized positions.

In fact, don't you think this is the very thing that "hedge" funds do? Manage money, professionally, using all available resources.

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Aug 10, 2018

Many of these fund managers capitalize on their momentum by raising permanent capital or reinsurance vehicles. These vehicles provide them with a base of capital that is perceived as permanent. It's a nice recurring revenue stream!

Some examples:
* Bill Ackman has Pershing Square Holdings
* David Einhorn has Greenlight Re
* Dan Loeb has Third Point Re

DYEL

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Aug 11, 2018

Many consultants who recommended these guys are like Einhorn and Ackman themselves stuck in GM and HLF.

They were already getting questions from end clients a few quarters into the underperformance. They probably said "trust us, trust Einhorn and Ackman, they will turn it around."

They are touting the same message today several years later. They have no other option. If they reverse course they admit that they were wrong and probably lose the client (certainly the client's trust).

The other thing I'd say is that I suspect that Einhorn and Ackman, when sitting across the conference table, present a highly compelling defense. Both are very bright with charisma and conviction. Wavering investors can be swayed by such personalities.

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Aug 14, 2018

https://www.wsj.com/articles/billionaire-investor-...
the onslaught continues...an article recently that even einhorn's son asked him "daddy, why can't you just short your longs and long your shorts to fix this?"

Aug 14, 2018

Ackman will be back in in 2019, mark my words. Some of his most important trades are just stuck in limbo at the moment. Can't speak for Einhorn... he really needs a broader value vs. growth pivot which may or may not be in the cards near term.

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Aug 14, 2018

agreed, i think ackman's prospects are much greater than einhorn's. ackman's already turning the corner, being up 12% or something like that YTD as of june 30. as for einhorn, as previous posters have alluded to, you don't have to be a growth investor to know not to short amzn...between his inability to embrace garp stocks, his hard partying as featured in wsj recently, etc. i foresee his aum shrinking dramatically in the near future

Aug 16, 2018

While I always recommend for people to just put their money in an index fund and forget about it, you can't look at 2-3 years of data and make a conclusion that people are fools for investing in them. It makes more sense to look at the lifetime returns of the firm or of individual investment vehicles the firm ran and then use that for a more objective opinion. If they sat there making predictable, positive returns every year, regardless of the market, they wouldn't be a hedge fund, they'd be a Ponzi scheme

Aug 21, 2018

No but you can look at a decades worth of data i.e. the Buffett bet.

Aug 28, 2018

This is a different conversation. The Buffett bet is comparing a basket of hedge funds versus the market. Again, I say put money in market with close to no fees over HF 99% of the time for 99% of the people. My point above still stands about 2-3 years not being enough time to evaluate one HF manager (same notion applies to a HF that has outperformed for 2-3 years).

Aug 16, 2018

I' having a bad August as well David. We'll be fine.

Aug 16, 2018

From 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."

MichaelScarn:

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?

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

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Aug 16, 2018

Who cares about beta?

I repeat: who cares about beta? Monte Carlo simulations? This is finance.

and LOL at "Passive investing would be in trouble had central bankers not decided to directly intervene in equity markets after the financial crisis." So if things had been different, things would have been different? Great insight Cliff!

And any smart hedge fund manager should have known the Fed was going to intervene, it's essentially enshrined in law.

Aug 16, 2018

Agree with Cliff here.

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Aug 20, 2018
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