Source: THE TELEGRAPH
The panic that swept the markets in August was tough for investors the world over, but particularly for the macro hedge funds, who bet big on economic trends.
The panic that swept the markets in August was tough for investors the world over, but particularly for the macro hedge funds, who bet big on economic trends.
Despite a reputation as “the smartest guys in the room”, earned from
promises to defy market volatility with complicated trades, hedge funds
suffered some of the most startling losses in the stock market bloodbath that started in China in June and sent the London market reeling by August.
Third Point, the $18bn (£12bn) fund run by the American billionaire
Daniel Loeb, has described recent trading as “a harrowing round trip”,
with danger lurking in China that “seems more intimidating than ever
before”.
Even Crispin Odey, the London hedge fund manager who made about £225m
from a bearish stance against China this summer, concedes that his
industry has had a difficult 2015. “No one is covered in glory this
year. When you have zero interest rates for a long time you end up with
misallocated capital… All you can do is think about how long this
equilibrium can last.”
A bruising
year for the hedge funds, while hardly tugging at the heartstrings of
most ordinary savers, has potentially wide-reaching effects. About one
in every four pounds in hedge funds worldwide is managed on behalf of
pension funds, according to the industry trade body AIMA, putting many
of us on the hook for these disastrous bets.
However, there are upwards of 10,000 hedge funds and they are a varied
bunch. Most will market themselves only to big institutional investors,
while others let individuals join, providing they have at least £100,000
and apply during the short fundraising windows. They often lock
investors into their fund, sometimes requiring more than a year’s notice
to take out money, or in times of extreme stress preventing withdrawals
in a controversial tactic known as “gating”.
While hedge funds attract the most attention for their aggressive short-selling campaigns, their recent rescue of the Co-op Bank or their pressure on the Argentinian and Puerto Rican authorities over debt piles, many of their investing strategies overlap with more traditional asset managers.
In stock markets they will hedge the risk of their investment by building up shareholdings, betting on the price going up, while short-selling other stocks to make some profit when shares fall. They will also try to bet on movements in currencies, interest rate derivatives, orange juice futures, and any number of more adventurous scenarios that ordinary investment managers will normally not attempt. Greek debts have proven popular.
Other hedge funds will dart in and out of assets quickly as events change. Merger arbitrage funds will position themselves in companies about to be taken over, either to profit from the bid price or to take the contrary position and bet on the deal collapsing.
This event-driven strategy has, along with the Chinese rout and the surprise double-dip in oil prices, combined to pummel a number of the world’s biggest hedge funds. Even after the failed merger between the pharmaceutical giants AbbVie and Shire last year was dubbed “arbageddon” for the damage it wrought on hedge funds, they could not resist repeating the trick in what is set to be a record year for deals.
“A lot of people have been caught out by high-profile M&A deals, the biggest of which was [the drugs firms] Perrigo and Mylan,” said Russell Barlow, head of hedge funds at Aberdeen Asset Management, which runs its own hedge funds and invests in others. “That’s been very painful for a lot of event-driven funds.”
According to Goldman Sachs, the share price of drug maker and takeover prospect Valeant has been responsible for 70pc of the poor performance in the hedge fund positions it tracked since the summer, highlighting a tendency for some managers to “herd” into particular trades.
Heavy concentration in the market has also been noted by regulators. A survey by the Financial Conduct Authority found that the 10 largest London-run firms accounted for 83pc of the overall gross market exposure among its sample, made 87pc of the overall trades, and represented 95pc of the counterparty risk to banks.
The largest hedge funds are currently squabbling with the global Financial Stability Board about which funds should be deemed “globally significant” and subject to more scrutiny, while awaiting the details of the OECD’s tax-avoidance crackdown on jurisdictions like the Cayman Islands, population 58,000 and the world’s fifth-biggest banking centre.
Despite some spectacularly bad bets, overall the hedge fund industry continues to grow. Assets under management have rocketed in the last 20 years. According to research from Citigroup, hedge funds around the world manage about $3 trillion, making them the third-biggest alternative investment source, behind property and private equity – even if this summer the hedgies were overtaken by the plain, low-cost exchange-traded fund industry, which simply tracks indices.
“The hedge fund universe offers investors such a diversity of alternative products and strategies that it should be no surprise that there will be winners and losers in any given year,” said Jack Inglis, chief executive of AIMA. “Pension funds and other investors continue to allocate to hedge funds not only because of the potential for positive, low-risk returns but also as very effective means of preserving capital and accessing particular investment opportunities that may not be available to them otherwise.”
Many hedge funds belied their low-risk reputation over the summer, instead tanking along with the financial markets they hope to beat.Hedge funds saw $95bn wiped off their value in the summer quarter, according to Hedge Fund Research, representing the biggest decline since the financial crisis in 2008. Even before the rout, hedge funds returned just 3.3pc last year, compared with a 5.5pc gain by simply parking money on the MSCI world index.
This less-than-sparkling performance has given some of the world’s biggest funds pause for thought. BlackRock, the world’s biggest asset manager, is closing the doors on its $1bn macro hedge fund and returning the money to its customers. Brevan Howard, founded by the Conservative donor Alan Howard, has cut 10pc of its workforce, having pulled out of Geneva to return to London earlier in the year.
Investors are also thinking again. “I would argue that people are quite cautious now, they won’t buy into hedge funds until they can show they can do well in difficult times,” said Odey.
The Californian pensions giant Calpers said last year it would stop using hedge funds, arguing that the poor returns failed to justify fees amounting to $135m a year.
The Wellcome Trust, an £18bn medical endowment based in London, has pared back its investment in hedge funds significantly to about £2.5bn since the financial crisis, but still sees the value in the industry.
“We started with hedge funds in the late ’90s and have now learnt to sort the sheep from the goats,” said Nick Moakes, managing director in the trust’s investment office. “Alternatives like macro and arbitrage ought to be delivering returns that are pretty much independent of the equity markets. The problem has been that a bunch of these firms got bigger, and a number of funds really haven’t delivered the goods consistently.”
Another hurdle for some investors is the opaque nature of many hedge funds, unlike equity managers that grant their customers daily access to how their stocks are doing. “You’re investing in a blind pool where you know as much as the manager chooses to tell you,” said Moakes.
Nevertheless, he said the trust is prepared to pay for a smaller number of funds that can demonstrate good returns. “It’s one of those asset classes where you don’t really want to be in the cheap ones. That’s not to say that we like paying high fees; absolutely not.”
Mayfair continues to attract new hedge funds Photo: ALAMY
Eurekahedge, the data provider, recently found that new hedge funds are charging performance fees of 14.7pc, down from 17.1pc last year and far below the traditional model of 2pc to manage the fund and a 20pc bonus for passing a profit threshold.
Some of the more established hedge funds are also trying to row back from their reputation for expense and obscurity. Quantitative hedge funds use computer programming to do the trading legwork on broad investment themes they see as profitable. Some of the biggest, including AQR and Cantab Capital, have launched pared-back versions of their flagship funds, with simpler strategies and fewer investments, and therefore lower fees. A handful have even found that the bargain version of the fund is performing better, at least in the short term.
Other funds, including Man Group in London, have floated parts of themselves on the stock market, raising capital while giving ordinary investors the chance to share in their performance. Bill Ackman’s Pershing Square raised $3bn on the Dutch stock exchange last year, although the shares have since slumped to a fifth below their debut value.
This retrenchment is also meaning lower wages for some hedge fund staff. While the successful Lansdowne funds paid £191m to the 21 top-performing staff last year, the average salary for an associate has fallen £5,000 to £75,000 over the past two years, while bonuses have dwindled from £70,000 to £45,000, according to Emolument.
The decline puts hedge funds just below the biggest investment banks when it comes to associate pay, making it more difficult for the industry to keep attracting “the smartest guys in the room”.
The central London property market, meanwhile, is still feeling the heat from the successful funds. In the hedge fund heartland of Mayfair and St James’s, rents are still rising for the best space, which now commands £125 per square foot, says the property company Cushman & Wakefield.
Marshall Wace, the American hedge fund, is almost tripling the size of its London headquarters this year, while CQS and Davidson Kempner are also moving into new space.
Start-up hedge funds are also coming thick and fast, said Lindsey Parslow, managing director of Mayfair Quarters, who sources office space. “Serviced offices are a popular choice because new funds can utilise a smaller space until something more substantial becomes available. In terms of the buoyancy of the market, most losses posted are someone else’s gain, which is the nature of the hedge fund industry. We certainly are not seeing any doors closing, only new ones opening up.”
Follow us on twitter @tshydo for more news
While hedge funds attract the most attention for their aggressive short-selling campaigns, their recent rescue of the Co-op Bank or their pressure on the Argentinian and Puerto Rican authorities over debt piles, many of their investing strategies overlap with more traditional asset managers.
In stock markets they will hedge the risk of their investment by building up shareholdings, betting on the price going up, while short-selling other stocks to make some profit when shares fall. They will also try to bet on movements in currencies, interest rate derivatives, orange juice futures, and any number of more adventurous scenarios that ordinary investment managers will normally not attempt. Greek debts have proven popular.
Other hedge funds will dart in and out of assets quickly as events change. Merger arbitrage funds will position themselves in companies about to be taken over, either to profit from the bid price or to take the contrary position and bet on the deal collapsing.
This event-driven strategy has, along with the Chinese rout and the surprise double-dip in oil prices, combined to pummel a number of the world’s biggest hedge funds. Even after the failed merger between the pharmaceutical giants AbbVie and Shire last year was dubbed “arbageddon” for the damage it wrought on hedge funds, they could not resist repeating the trick in what is set to be a record year for deals.
“A lot of people have been caught out by high-profile M&A deals, the biggest of which was [the drugs firms] Perrigo and Mylan,” said Russell Barlow, head of hedge funds at Aberdeen Asset Management, which runs its own hedge funds and invests in others. “That’s been very painful for a lot of event-driven funds.”
According to Goldman Sachs, the share price of drug maker and takeover prospect Valeant has been responsible for 70pc of the poor performance in the hedge fund positions it tracked since the summer, highlighting a tendency for some managers to “herd” into particular trades.
Heavy concentration in the market has also been noted by regulators. A survey by the Financial Conduct Authority found that the 10 largest London-run firms accounted for 83pc of the overall gross market exposure among its sample, made 87pc of the overall trades, and represented 95pc of the counterparty risk to banks.
The largest hedge funds are currently squabbling with the global Financial Stability Board about which funds should be deemed “globally significant” and subject to more scrutiny, while awaiting the details of the OECD’s tax-avoidance crackdown on jurisdictions like the Cayman Islands, population 58,000 and the world’s fifth-biggest banking centre.
Despite some spectacularly bad bets, overall the hedge fund industry continues to grow. Assets under management have rocketed in the last 20 years. According to research from Citigroup, hedge funds around the world manage about $3 trillion, making them the third-biggest alternative investment source, behind property and private equity – even if this summer the hedgies were overtaken by the plain, low-cost exchange-traded fund industry, which simply tracks indices.
“The hedge fund universe offers investors such a diversity of alternative products and strategies that it should be no surprise that there will be winners and losers in any given year,” said Jack Inglis, chief executive of AIMA. “Pension funds and other investors continue to allocate to hedge funds not only because of the potential for positive, low-risk returns but also as very effective means of preserving capital and accessing particular investment opportunities that may not be available to them otherwise.”
Many hedge funds belied their low-risk reputation over the summer, instead tanking along with the financial markets they hope to beat.Hedge funds saw $95bn wiped off their value in the summer quarter, according to Hedge Fund Research, representing the biggest decline since the financial crisis in 2008. Even before the rout, hedge funds returned just 3.3pc last year, compared with a 5.5pc gain by simply parking money on the MSCI world index.
This less-than-sparkling performance has given some of the world’s biggest funds pause for thought. BlackRock, the world’s biggest asset manager, is closing the doors on its $1bn macro hedge fund and returning the money to its customers. Brevan Howard, founded by the Conservative donor Alan Howard, has cut 10pc of its workforce, having pulled out of Geneva to return to London earlier in the year.
Investors are also thinking again. “I would argue that people are quite cautious now, they won’t buy into hedge funds until they can show they can do well in difficult times,” said Odey.
The Californian pensions giant Calpers said last year it would stop using hedge funds, arguing that the poor returns failed to justify fees amounting to $135m a year.
The Wellcome Trust, an £18bn medical endowment based in London, has pared back its investment in hedge funds significantly to about £2.5bn since the financial crisis, but still sees the value in the industry.
“We started with hedge funds in the late ’90s and have now learnt to sort the sheep from the goats,” said Nick Moakes, managing director in the trust’s investment office. “Alternatives like macro and arbitrage ought to be delivering returns that are pretty much independent of the equity markets. The problem has been that a bunch of these firms got bigger, and a number of funds really haven’t delivered the goods consistently.”
Another hurdle for some investors is the opaque nature of many hedge funds, unlike equity managers that grant their customers daily access to how their stocks are doing. “You’re investing in a blind pool where you know as much as the manager chooses to tell you,” said Moakes.
Nevertheless, he said the trust is prepared to pay for a smaller number of funds that can demonstrate good returns. “It’s one of those asset classes where you don’t really want to be in the cheap ones. That’s not to say that we like paying high fees; absolutely not.”
Mayfair continues to attract new hedge funds Photo: ALAMYEurekahedge, the data provider, recently found that new hedge funds are charging performance fees of 14.7pc, down from 17.1pc last year and far below the traditional model of 2pc to manage the fund and a 20pc bonus for passing a profit threshold.
Some of the more established hedge funds are also trying to row back from their reputation for expense and obscurity. Quantitative hedge funds use computer programming to do the trading legwork on broad investment themes they see as profitable. Some of the biggest, including AQR and Cantab Capital, have launched pared-back versions of their flagship funds, with simpler strategies and fewer investments, and therefore lower fees. A handful have even found that the bargain version of the fund is performing better, at least in the short term.
Other funds, including Man Group in London, have floated parts of themselves on the stock market, raising capital while giving ordinary investors the chance to share in their performance. Bill Ackman’s Pershing Square raised $3bn on the Dutch stock exchange last year, although the shares have since slumped to a fifth below their debut value.
This retrenchment is also meaning lower wages for some hedge fund staff. While the successful Lansdowne funds paid £191m to the 21 top-performing staff last year, the average salary for an associate has fallen £5,000 to £75,000 over the past two years, while bonuses have dwindled from £70,000 to £45,000, according to Emolument.
The decline puts hedge funds just below the biggest investment banks when it comes to associate pay, making it more difficult for the industry to keep attracting “the smartest guys in the room”.
The central London property market, meanwhile, is still feeling the heat from the successful funds. In the hedge fund heartland of Mayfair and St James’s, rents are still rising for the best space, which now commands £125 per square foot, says the property company Cushman & Wakefield.
Marshall Wace, the American hedge fund, is almost tripling the size of its London headquarters this year, while CQS and Davidson Kempner are also moving into new space.
Start-up hedge funds are also coming thick and fast, said Lindsey Parslow, managing director of Mayfair Quarters, who sources office space. “Serviced offices are a popular choice because new funds can utilise a smaller space until something more substantial becomes available. In terms of the buoyancy of the market, most losses posted are someone else’s gain, which is the nature of the hedge fund industry. We certainly are not seeing any doors closing, only new ones opening up.”
Follow us on twitter @tshydo for more news
No comments:
Post a Comment