The “Smart Money” can’t even fake it anymore

An incredibly telling story at Reuters about Morgan Stanley’s hedge fund conference in Palm Beach this past week, where enthusiasm and confidence seem to have fallen to an all-time low. And the weird thing is, this was supposed to be the environment in which the hedge fund industry shines – shorts working as well as longs, mass dispersion between winners and losers, etc.

But it hasn’t actually worked out that way, thanks to rising correlations between the industry and the S&P 500, disastrously concentrated bets in crowded stocks and straight up wrong calls on the macro environment. Instead, everywhere you look there are name-brand hedge funds with portfolios that look like the road between the Citadel and Gas Town.

It’s easy to understand why a resort hotel filled with these ladies and gentlemen isn’t quite the party atmosphere it normally should have been, when everyone there is worth eight figures.

Reuters:

“I’m disappointed by their attitudes – they seem resigned and disappointed,” said one hedge fund allocator and longtime event attendee who was hoping for more novel investment ideas. “No one is really excited by anything.”

and…

“I’ve never seen the place at such a loss,” added another large investor about hedge fund managers who presented. “They’re all cautious.”

and finally…

“It takes someone very special to earn the high fees,” said one representative of a wealthy family. Hedge funds typically charge a 2 percent fee for assets managed and keep 20 percent of profit generated…

“These ‘brilliant’ guys,” the person said, “got tossed around like toy boats in a hurricane.”

In the fourth quarter, we learned that there is a limit to how much patience the ultra-high net worths have with the dashed promises of the industry. The longer this goes on, the more that limit will start to look like a permanent ceiling.

I’m all for hedging, so long as the hedges don’t carry so much idiosyncratic drawdown risk that they require hedges of their own!

Sources:

Palm Beach hedge fund glitz fails to impress some investors (Reuters)

There is a limit (TRB)