A Return to Alpha … or Not: Random Shots
By Chris ClairBack in the Saddle
Unless the bottom really falls out this month, hedge funds are set to end 2009 up around 20%, roughly equivalent with broader equity markets. That should close the books on 2008—yes, 2008—once and for all. It’ll go down as an anomaly in hedge fund performance, with a bright red asterisk next to the negative 19% figure—or whatever it was in your hedge fund index of choice.
So the hedge fund industry should be celebrating, right? Back in black and all that. Well, maybe.
In the spring, I posed these questions to a panel of experts comprising Samer Nsouli of Lyford Group International; James Lubin of Hyman Beck & Co.; Larry Siegel, then of the Ford Foundation; and Jacob Gottlieb of Visium Asset Management: Did the disastrous 2008 weed out all the beta poseurs? Have we returned to alpha in the hedge fund industry?
The verdict was it was too soon to tell. My bet, now that the end of the year is in sight, is that, incredible as it may seem, 2008 wasn’t painful enough to weed out the beta poseurs. When the stock market tanks again—and it will—many hedge funds will be dragged under, too. See, it’s not really a secret any more that many hedge funds do not hedge. When I started covering this business a decade ago, I was told that the idea behind hedge funds was to be up but not as much as the market in bull cycles and still positive in bear cycles.
Most hedge funds have the up in bull market cycles part covered. But they fail to cover their butts—or much of anything else—when the bear comes out. If equity markets are down again sharply in 2010, expect long/short equity managers to be down nearly in lockstep. Not still positive but just not AS positive, not down but down less than the markets. Down about the same as the market. Last I checked, that wasn’t alpha. But hey, I can’t afford 2 and 20 anyway, so what do I know?
I’m curious to hear what you think. Am I pissing on the parade? Missing the point?
Headlines that Hurt
From Reuters, via HedgeWorld: Probe Extended One Month in U.S. Insider Trade Case
Most headlines that hurt involve probes. Probes into things. Painful probes. Avoid the probes, people, for your own comfort and safety.
Modus Operation
Not that anyone gives a whit about my status, but for the curious I am “recuperating.” I had knee surgery last Thursday [Dec. 3] to repair a torn anterior cruciate ligament. The ACL is basically a fat bundle of ligament tissue that connects your femur and your tibia and keeps one from sliding around above or below the other. Sliding is bad and it hurts when it happens. It’s also not a good thing when you like to play tennis, run or are occasionally asked to carry heavy items up or down stairs.
So now I have what’s known as an “allograph,” or cadaver tissue, serving as my ACL. When my brother had his ACL replaced (or “reconstructed,” as the doctors like to say) a few years ago, his doctor used part of his own hamstring. He can still feel the missing hamstring tissue, but the knee is fine.
These days, ACL replacement surgery is an outpatient procedure. You go in in the morning and are on your way home by lunchtime. While the procedural time has been cut (no pun intended), the recovery time has not. I’m looking at a couple of weeks on crutches, a few more weeks using a cane, six months ’till I can ride my motorcycle and a year until maximum recovery—which may be something less than 100%.
Remarkably, I’ve spoken with at least a half-dozen people who are having the surgery soon themselves, had it recently or know someone who is. If you’re contemplating it and want post-op details, just ask. I’ll dish.
Pearl of Wisdom
It should be noted that today was Pearl Harbor Day. Along that line of thought, the History Channel just put out a stunning 10-part high definition series about World War II. Some of the footage is very raw and that, coupled with the excellent narration by Chicago’s (well, actually Blue Island’s) own Gary Sinise, helps to put a sobering face on this war business. It ain’t a video game, kids.
December 11th, 2009 at 3:06 pm
No, you are absolutely NOT missing the point. I’m so amazed over the herd stampede we’re witnessing at the moment in the Hedge Fund environment. As a apart of my technical analysis I gauge the sentiment on various markets on a weekly basis and a part of that is looking at the Hedge Funds positions - their exposures. According to the latest ML’s Hedge Fund Monitor, the Equity L/S exposure is well above historic levels and that’s not all - Hedge Funds right now are behaving like a stampede. They are bullish all over the place and it’s crowded!
So why are they behaving like this?
1) All the Fundamentalist are generally basing their analysis on unrealistic P/E levels. That creates a false illusion of cheap stocks.
2) Lots of the portfolio managers are former traders who generally follows the crowd.
And finally…
3) High Watermarks. For most of the Hedge Fund Industry to generate income once again they have to get by the high watermarks. To cover a 50% loss they have to generate a 100% gain and because of the “Low interest rate/Cheap dollar” carry trade it’s actually possible at the moment to generate huge gains by betting against the dollar.
So the big question is “Will it continue?” Off course not. The dollar will soon turn around and become bullish. And we all know what that means.