For some reason, yesterday I heard the soundbite that “Hedge funds are back! On pace to have their best month/quarter/year since blah blah blah” repeated at least a dozen times.
Absurd. I can think of several high net worth people I’ve spoken with in just the last few weeks that would give up a firstborn child to get away from a gated fund or two.
The hedge fund industry claims many of the most talented managers on earth…but it also features some of the most insipid me-too acts since the tragic Boy Band Craze of the late 90’s launched a thousand cheesy singing groups from Orlando, Florida. OK, that was a ludicrous analogy, but still…
Many of the late-comers and also-ran funds have already been been drummed out of hedgieland and most funds are but a shadow of their former selves asset-wise.
That said, the real story you didn’t hear yesterday is that money is still fleeing the industry at an astounding rate…
According to The Hennessee Group:
Investors have continued to pull money out of the hedge funds after having removed a record $152 billion in the last quarter of 2008.
In July, the most recent month for which data is available, clients redeemed $20 billion from hedge funds, significantly more than the $6.9 billion they pulled out in June.
Yes, that’s correct, triple the amount of money was pulled from hedge funds in July than in the prior month.
Too be fair, some of that is related to redemption requests that could not be honored during the heart of the liquidity crisis and some is probably from the worsening conditions in employment and real estate, which forces investors to move money even from performing assets.
But the breathless reporting of the Return of the Hedge Fund we heard yesterday for the most part neglected the fact that the predilection of the wealthy for more plain vanilla investment management has still not changed. Investors are clearly taking more risks than they were willing to last winter, but they want transparency, control and liquidity – three things that the hedge fund industry cannot offer them, for the most part.
This goes for individual investors, endowment investors, pension investors, sovereign wealth investors, corporate investors, international investors, etc.
I predicted this change in investor tastes 9 months ago and I don’t see this trend abating right now, despite the fact that as a group, hedge funds have outperformed the S&P 500 year-to-date by 5 whole percentage points, plus 17% to plus 12% through August.
Most investors will gladly take the 12% and leave the 17% return to someone else.
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good write-up Josh. Cash is king and I know I for sure would be pissed if I was gated. The whole crisis has definitely shifted the way investors (individual or institutional) have to examine fee structures, redemption policies, high watermark enforcement, etc. And with all the talk of regulation, regulation, regulation, the industry is certainly shaped for a re-tooling at the very least.
After all, cash is king and investors control the flow of capital & provide hedge funds a way of making money. Trouble is, your leverage over those funds disappears when you can’t even get to your money.
Jay
@marketfolly
TRB: Jay, we completely agree…performance is terrific, but not if it comes at the expense of liquidity. thx!
good write-up Josh. Cash is king and I know I for sure would be pissed if I was gated. The whole crisis has definitely shifted the way investors (individual or institutional) have to examine fee structures, redemption policies, high watermark enforcement, etc. And with all the talk of regulation, regulation, regulation, the industry is certainly shaped for a re-tooling at the very least.
After all, cash is king and investors control the flow of capital & provide hedge funds a way of making money. Trouble is, your leverage over those funds disappears when you can’t even get to your money.
Jay
@marketfolly
TRB: Jay, we completely agree…performance is terrific, but not if it comes at the expense of liquidity. thx!
good write-up Josh. Cash is king and I know I for sure would be pissed if I was gated. The whole crisis has definitely shifted the way investors (individual or institutional) have to examine fee structures, redemption policies, high watermark enforcement, etc. And with all the talk of regulation, regulation, regulation, the industry is certainly shaped for a re-tooling at the very least.
After all, cash is king and investors control the flow of capital & provide hedge funds a way of making money. Trouble is, your leverage over those funds disappears when you can’t even get to your money.
Jay
@marketfolly
TRB: Jay, we completely agree…performance is terrific, but not if it comes at the expense of liquidity. thx!
It’s a flight to quality and liquidity, not a flight to cash. I bet those investors you mention aren’t pulling out of Renaissance, they’re pulling money from all the me-too acts. Those are the ones that will suffer in this downturn, but the long term move to hedge funds will continue without a hitch. That’s because no alpha producing manager will let himself be constrained by the ridiculous requirements of mutual funds. What else is there for those investors that seek returns above all else?
It’s a flight to quality and liquidity, not a flight to cash. I bet those investors you mention aren’t pulling out of Renaissance, they’re pulling money from all the me-too acts. Those are the ones that will suffer in this downturn, but the long term move to hedge funds will continue without a hitch. That’s because no alpha producing manager will let himself be constrained by the ridiculous requirements of mutual funds. What else is there for those investors that seek returns above all else?
It’s a flight to quality and liquidity, not a flight to cash. I bet those investors you mention aren’t pulling out of Renaissance, they’re pulling money from all the me-too acts. Those are the ones that will suffer in this downturn, but the long term move to hedge funds will continue without a hitch. That’s because no alpha producing manager will let himself be constrained by the ridiculous requirements of mutual funds. What else is there for those investors that seek returns above all else?
noloze,
You reference Renaissance, but indeed investors have flocked from them as well. On a 12 month basis, their assets under management are down 41.38%.
Not arguing that hedge funds will not be allocated capital going forward; they most certainly will be. Agree with your point that funds will weed out the weak and the industry will go through yet another Darwinian process. However, no one is truly ‘safe’ in these amazing times.
Jay
@marketfolly
noloze,
You reference Renaissance, but indeed investors have flocked from them as well. On a 12 month basis, their assets under management are down 41.38%.
Not arguing that hedge funds will not be allocated capital going forward; they most certainly will be. Agree with your point that funds will weed out the weak and the industry will go through yet another Darwinian process. However, no one is truly ‘safe’ in these amazing times.
Jay
@marketfolly
noloze,
You reference Renaissance, but indeed investors have flocked from them as well. On a 12 month basis, their assets under management are down 41.38%.
Not arguing that hedge funds will not be allocated capital going forward; they most certainly will be. Agree with your point that funds will weed out the weak and the industry will go through yet another Darwinian process. However, no one is truly ‘safe’ in these amazing times.
Jay
@marketfolly
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Actually, investors who make 12% while some other asset class returns 17% will fire their advisers for causing them to miss out on fabulous returns. Recent studies into utility and behavioral finance have shown that investors don’t value downside protection or liquidity or other intangibles if their peers are achieving superior returns… not that I agree with this logic, it’s just that this is the prevailing attitude.
TRB: I suppose I’ve seen the studies here and there, but I don’t believe they were done post-2008.
I can only go by what I hear from investors and other advisors with their own clients each day. I think the anecdotal is trumping the study big time right now.
thx for reading!
Actually, investors who make 12% while some other asset class returns 17% will fire their advisers for causing them to miss out on fabulous returns. Recent studies into utility and behavioral finance have shown that investors don’t value downside protection or liquidity or other intangibles if their peers are achieving superior returns… not that I agree with this logic, it’s just that this is the prevailing attitude.
TRB: I suppose I’ve seen the studies here and there, but I don’t believe they were done post-2008.
I can only go by what I hear from investors and other advisors with their own clients each day. I think the anecdotal is trumping the study big time right now.
thx for reading!
Actually, investors who make 12% while some other asset class returns 17% will fire their advisers for causing them to miss out on fabulous returns. Recent studies into utility and behavioral finance have shown that investors don’t value downside protection or liquidity or other intangibles if their peers are achieving superior returns… not that I agree with this logic, it’s just that this is the prevailing attitude.
TRB: I suppose I’ve seen the studies here and there, but I don’t believe they were done post-2008.
I can only go by what I hear from investors and other advisors with their own clients each day. I think the anecdotal is trumping the study big time right now.
thx for reading!