It's been a while since I posted (sorry @AndyLouis) so I decided to come back with something a little different from my previous posts. I'll continue the E&F posts at some point, but given recent market conditions I thought this was more appropriate. The below is a compilation of thoughts I've been having on markets and the a whole.
The hedge fund industry isn't going away
Bloomberg and the Financial Times have written quite a few articles recently that highlight "major" hedge fund closings. Whether it be an old, established firm closing its doors due to bad market conditions or a fund that can't meet redemptions, the financial media can't help but shout that HFs are going away. While these articles are great clickbait, they couldn't be farther from the truth. 2015 did have some funds close, but that happens every year. Too lazy to pull in the data &AUM and closings, but 2015 was not a cause for concern that the industry is going away.
Stop comparing HF returns to _______
Stop. Just stop now. Every time I see an article about a HF or HF indexes underperforming the S&P 500 I want to throw something at my monitor. The goal of a Hedge Fund is not to beat a 100% long only index. In fact, the reason lots of large institutions put HFs in an asset class called absolute return is because they are supposed to provide a consistent absolute return, not beat the S&P. Regardless, the financial media & large pensions love to go into the spotlight and talk about the underperformance of hedge funds. If your hedge funds provide consistent positive returns throughout a market cycle you're getting your money's worth and more. Stop complaining about relative performance.
Hedge funds aren't hedging
Going off the last point, more & more HFs aren't hedging their portfolios anymore. Especially in L/S equity. I cannot tell you how many times I see a portfolio that is 80% net long and calls itself L/S. I'm sorry, but at that point your beta is probably as close to 1 as a Vanguard mutual fund. This is late cycle behavior when managers are trying to chase extra bps by going just a little longer. Unfortunately, they'll lose a lot more in the next downturn.
Everyone wants to be a hedge fund
A hedge fund is a structure, not an asset class. It's a comingled fund that typically charges above average fees. I've recently seen quite a few long only public equity strategies that are comingled funds with lockups and high fees. What? You'reequities that you could easily exit in a few days of trading and you want 2/20 with a 2 year lockup and quarterly liquidity? Being a hedge fund is the cool thing to do now and long only equity managers are starting to do it. The point of liquidity notice periods is for illiquid investments and the higher fees are for superior returns in a full market cycle. Long only equity investors cannot provide this and therefore do not deserve these fees and structures. Yet, unsophisticated investors who want to sound impressive will invest in these funds, hence encouraging others to do the same.
Things are getting more complicated
This is the last point I'm going to make. I'm seeing more "new" strategies. Funds that do things that don't make sense or are hard to understand. My favorite was a placement agent who said "returns come from a variety of places" when asked what the drivers of a firm's strategy was. The strategy made such little sense that even the placement agent couldn't explain it. If it hasn't been done in the past, there's probably a reason for it. Why are you so lucky that you figured something out that all the other smart people couldn't? Not saying it can't happen, just very unlikely.
That's it for my rambling. It's an interesting time to be an investor. I think we'll see the landscape change over the next decade where the truly great hedge funds will continue to prosper under the premium structure and more of the lower tier funds will revert to traditional structures or close. More random thoughts to come in the future.
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