News > Hedge Funds

Barclay hedge fund index drops 2.45% in August; emerging markets off 10.46% in past 3 months
Hedge Funds
<p>Here's a big whoopee: Hedge funds were down only 2.45% in August compared to a drop of 6.26%  for the S&amp;P 500. Of course, most broad stock market investors weren't paying huge upfront fees.</p> <p>Hedgies took smaller losses than the MSCI emerging markets index. In August the Barclay EM index fell 5.39% vs 9.04% for the MSCI EM index. In the past three months, the MSCI EM index tumbled an impressive 17.55% vs 10.46% for the funds in the Barclay universe.</p> <p>The Barclay Hedge Fund Index compiled by BarclayHedge is hanging on by its nails to a gain for the year, up 0.23%. Here's what the data collector had to say:<br /> “A surprise currency devaluation by the People’s Bank of China on August 11 was interpreted by investors as an indication of a weakening economy, and sparked a global sell-off of risk assets,” says Sol Waksman, founder and president of BarclayHedge.</p> <p>Fifteen of Barclay’s 18 hedge fund indices had losses in August. The Emerging Markets Index dropped 5.39%, its largest loss since May of 2012 when it dropped 5.39%. Emerging Markets have fallen 10.46% in the past three months.</p> <p>“Emerging markets were hit especially hard as concerns of a global slowdown provoked fears of contagion and triggered sell-offs in commodities as well as Asian currencies, credits, and equities," says Waksman.</p> <p>Healthcare &amp; Biotechnology lost 4.38% in August, Distressed Securities fell 4.28%, and the Equity Long Bias Index was down 3.37%.</p> <p>The Equity Short Bias Index was the big winner in August, with an 8.75% gain. Equity Market Neutral was up 0.42%, and Fixed Income Arbitrage added 0.12%.</p> <p>At the end of August, the Healthcare &amp; Biotechnology Index is up 9.96% for the year, Pacific Rim Equities have gained 5.19%, Merger Arbitrage is up 4.74%, and European Equites have gained 4.39%.</p> <p>The Distressed Securities Index has lost 5.63% year to date, Emerging Markets are down 3.15%. and the Event Driven Index has lost 0.53%.</p> <p>The Barclay Fund of Funds Index lost 2.10% in August, but is still up 0.92% in 2015.<br /> Photo: SteFou </p>
The rise of the ethical hedge fund
Hedge Funds
<p>Hedge funds, in the eyes of the general public, seem to be nothing but vehicles of cutthroat greed, tools for untold and unfair riches, or to quote former UK Prime Minister Edward Heath, “the unacceptable face of capitalism.” With investors pushing for more ethical investments however, that image might actually change.</p> <p>The Financial News reports that Deutsche Asset &amp; Wealth Management has just sealed a deal with an unnamed hedge fund to create a product that will “invest only in stocks screened using ethical, social and governance guidelines,” adding that it plans to create more of these vehicles in the near future.</p> <p>This isn’t the first time a fund decided to integrate ESG principles though, Jersey-based Auriel Capital has been doing so since 2009, and Lansdowne Partners have been running a version of its $10 billion Developed Markets fund using ethical guidelines for quite some time already.</p> <p>However, they’re quite miniscule compared to their unconstrained brethren. Lansdowne’s ESG fund runs a mere $212 million compared to its 11-figure big brother, while Auriel Capital’s ESG strategies seem to be a non-dominant slice of its total AUM.</p> <p>Still, Deutsche’s signing could mean a lot for the space in the longer term, and as their competitor Lyxor says, demand for such products have been growing at “a very fast pace” the past years. That, coupled with the industry’s current scramble to repackage itself, could mean that we might see friendlier, more socially and environmentally conscious hedge funds within the decade. Stay tuned.<br /> Photo: Julija Rauluševičiūtė</p>
The 3 best (and worst) things about being a fund manager this year
Hedge Funds
<p>With the PBOC loosening its grip on the yuan, the Shanghai Composite collapsing like a wet taco, and the Fed prolonging its guessing game, 2015 has been anything but boring so far.</p> <p>That said, not a lot of people have been encouraged by the myriad equity surprises and monetary plot twists this year, so here’s a little somethin somethin to keep things in perspective.</p> <p>Here are the three best, and worst, things about being a fund manager in 2015.</p> <p>Best:</p> <p>Hedge fund inflows continue to break records. You don’t even need to be a fund manager to know this one. Inflows to the hedge fund industry have been soaring to new highs of late, and traders have been enjoying the most money they’ve ever had to play with in years.</p> <p>These markets actually aren’t too bad. They may not be as smooth and trending as those in the 80's and the 90's, but today’s markets have been posting swings meaty enough for agile traders. Meanwhile, a tumble in cash returns and a climb in small cap and international stock competitiveness has created a veritable stock-picker’s market -- especially in contrast to 2014.</p> <p>It’s a wonderful time to be in the markets. No matter how bad you’re doing, the world is in an interesting juncture right with commodities hitting rock bottom, China rising, Europe struggling to grow, and the Fed flip-flopping on rates. It may sound bad but it’s one hell of a time to cut your teeth in.</p> <p>Worst:</p> <p>“Hedge fund” is still a bad word. With 2016 being an election year, hedge fund managers might as well tattoo “greed is good” on their foreheads right now. Elizabeth Warren, Donald Trump, and a whole host of presidentiables and senatoriables are still taking sight on the industry. And let’s not forget the witch hunts currently raging in China.</p> <p>The markets are good for your competitors too. Competition within the hedge fund arena is absolutely fierce right now, and industry performance has taken a massive hit because of it. The rise of the liquid alts space isn’t helping hedge funds post higher returns either.</p> <p>No one really knows what really going to happen. It may be a great time to cut your teeth in but that’s only if you get to survive it. No one really knows what’s going to happen if the Fed decides to lift rates, for all we know Fedmageddon might ensue and volatility will reign. As it is, uncertainty has already reared its ugly head.<br /> Photo: Shaun Wong</p>
Jim Chanos reading list
Hedge Funds
<p>Jim Chanos started Kynikos Associates in 1985 and the group has since become the world's largest exclusive short-selling investment firm. As of mid 2015, The hedge fund manages approximately $6 billion in assets.</p> <p>Throughout his investment career, Chanos has identified and sold short the shares of numerous well-known<br /> corporate financial disasters; among them Baldwin-United, Commodore International, Coleco, Integrated Resources, Boston Chicken, Sunbeam, Conseco and Tyco International. His celebrated short-sale of Enron shares was dubbed by Barron's as "the market call of the decade, if not the past fifty years."</p> <p>Chanos’ most famous short landed Chanos on the cover of Barron’s in 2002 as “The Guy Who Called Enron.” But the list of his targets stretches from Michael Milken’s junk bond empire through the real estate boom of the late 1980s, the telecom bubble of the late 1990s, Dennis Kozlowski’s Tyco and Bernie Ebbers’s WorldCom at the turn of the century, subprime mortgage lenders and home builders in 2007, and most recently China.</p> <p>For more on Jim Chanos, head over to ValueWalk’s Jim Chanos Resource Page, where you can find a detailed rundown of his background, bio and investment philosophy.<br /> Jim Chanos: Recommended books<br /> The Match King: Ivar Kreuger, The Financial Genius Behind a Century of Wall Street Scandals<br /> Frank Paternoy. The story of a 20th century Swedish businessman named Ivar Kreugar, who convinced everyone that he's a tycoon in the match business. Really, he just borrowed money in the U.S. and loaned it out in Europe in exchange for match companies.</p> <p>Bernard Baruch: The Adventures of a Wall Street Legend<br /> James Grant. This biography of Bernard Baruch considered to be renowned as the definitive story about the notorious financial wizard and presidential advisor.</p> <p>Waterloo: The History of Four Days, Three Armies, and Three Battles</p>
Oil, China pulls Kynikos deep into the black
Hedge Funds
<p>The past few years have been nothing short of brutal for the short-only hedge fund space. QE3 was launched in September 2012, equities went through the roof, and the market has never looked back since. HFR data shows that from 2012 to 2014, short-only funds lost an average of 35%, a stark contrast to the S&amp;P’s over 75% gain in the same period.</p> <p>Thankfully however, 2015’s a little different – especially for Jim Chanos’ crew at 22 West 55th Street.</p> <p>After losing money since 2012, Jim Chanos’ Kynikos Associates is now firmly in the black according to the Wall Street Journal, and it didn’t just creep there either, no, it actually posted some respectable gains in August alone:<br /> The Ursus and Kriticos funds, which bet only against stocks, gained 6.2% and 8.2% in August, according to the document.<br /> The fund’s returns were mostly driven by bets against energy prices and – you guessed it – China, though the former did drive most of the gains, according to someone familiar with the matter.</p> <p>Still, the returns are tiny compared to Kynikos’ glory years. In 2008, when vaunted hedge funds such as Tudor and SAC chalked up their first ever losses, the firm’s Ursus fund surged 62%. And let’s not forget Chanos’ epic Enron short back in 2001.</p> <p>They still have more than enough reason to cheer up though. Recent Preqin analysis shows that hedge funds overall slipped 1.88% in August, exacerbating a 0.45% fall in July, and took the industry’s returns down to 1.96% year to date. And besides, as Chanos said two months ago regarding China, “The story has yet to play out…As long as China adds credit faster than its growth, the real story is months and years ahead.” I’m sure he’ll be there when that happens.<br /> Photo: Insider Monkey</p>
Kyle Bass cautions about mounting bad debts In China
Hedge Funds
<p>Kyle Bass, Hayman Capital Management founder and managing partner, sounded alarm bells on Tuesday, saying that Chinese banks will likely experience losses that may impact the country's economy as a whole.</p> <p>In his interview on CNBC’s “Squawk on the Street” on Tuesday, Bass said other Asian countries like Malaysia were also facing the same issue.</p> <p>&nbsp;<br /> Kyle Bass: China’s bank assets $31 trillion vs GDP of $10 trillion<br /> During his interview on CNBC, Kyle Bass said Chinese bank assets are up close to 400% since 2007, and now represent about $31 trillion against an economy with a gross domestic product of $10 trillion.</p> <p>Striking a cautionary tone, Bass said: “When you run a bank expansion that aggressively, that quickly, you’re going to have some losses”. He added: “the scary thing about that is a likely 10% asset loss in the banking sector would amount to $3 trillion."</p> <p>Elaborating further on the impact of such huge losses, Bass indicated that such huge losses would force China to use much of its foreign exchange reserves (which stand at about $3.6 trillion) and sell bonds to recapitalize the banking system.</p> <p>Bass indicated that when banks expand so aggressively, they’re entering the non-performing loans cycle in Asia. Touching upon the impact on other Asian countries, he said Malaysia is also facing the same issue, and as a result investors in emerging markets should carefully monitor the size of emerging market countries’ banking systems.<br /> Emerging markets account for 42% of global GDP<br /> Bass said the huge asset losses in the banking sectors are mirrored in many emerging markets, especially those in Asia, and could hence ultimately impact global GDP. He argues the ripples of an emerging market downturn could draw U.S. GDP lower than estimated, but countries like South Africa could be seriously impacted.</p> <p>He noted his investment group is closely watching nations that run twin deficits, and those that may have to devalue their currency "in order to come back to some level of competitiveness with the rest of the world."</p> <p>Striking a cautionary tone for the next two years, Bass said as the loan cycle forces emerging market banks to see steep losses, “the next two years are going to be tough”.</p> <p>Bass highlighted that Asian banks are experiencing a sustained period of increased loan losses, and that global gross domestic product growth would slow more than expected as a result.</p> <p>Underscoring the importance of emerging markets, Bass said emerging markets comprise 42% of global GDP. He reckons global GDP will slow more than people anticipate.</p> <p>Highlighting the forex outflow from emerging markets, Bass said that while money has flowed into emerging markets over the past decade, there was currently a “huge FX reserve drain”. Earlier, David Tepper of </p>
Well, we know one thing. Maybe. Hedge funds had a lousy month in August
Hedge Funds
<p>Yes, it's time for another measurement of hedge fund performance. Preliminary data shows the Barclay Hedge Fund Index fell 2.09% in August, its worst month since May 2012.</p> <p>But Hedge Fund Research reports a 1.87% drop for its HFRI Fund Weighted Composite Index in August, also HFRI's worst since May 2012.</p> <p>Unless it wasn't all that bad, as SS&amp;C GlobalOp suggests in its August report, in which hedge funds edged down 1.02%.</p> <p>Everyone agrees the S&amp;P 500 has slipped year-to-date 4.75%; hedge funds are up more. We'll leave it at that. (BarclayHedge says they're up 0.62%.)</p> <p>Everyone also agrees that Greece and China were not good for performance -- although we always thought volatility was good for traders. The biggest winner still appears to be Biotech finds. The Barclay's Healthcare &amp; Biotechnology Index climbed 12.6%.</p> <p>So why the discrepancy in performance numbers? The biggest issue hedge fund data has is that it's all self-reported. Not that hedge funds aren't totally on the up-and-up, but they may leave some data open to interpretation when they report it. Services like HFR, Barclay, and SS&amp;C only share about 60% to 70% of the same firms and data. "While we all draw from a similar universe of hedge funds, we don't draw from the same universe of hedge funds," says Sol Waksman, founder of BarclayHedge.</p> <p>Even assets that look the same may be quite different. Equity long short is a popular category for hedge funds. Barclays breaks up this category into equity long short and equity long bias, depending on what percentage exposure the funds have. Other trackers likely don't break it up this way, making Barclays measures for equity long short smaller than other firms, says Waksman.</p> <p>"There is no best [index]," says Waksman. "If you want a better estimate, take two, three, or four of them."</p> <p>"We're not there to say, 'hey this is the best'," he adds. "We're more there to save the time of managers," by offering a filtered look at hedge funds and their performance.</p> <p>This discrepancy between funds is really unique to the alternative world that is more gray, and relies on self-reporting. Mutual funds, for instance, are required to report their holdings and performance, says Michelle Swartzentruber, senior research analyst at Morningstar. Morningstar data may differ a tiny bit from, say, Lipper, but it's going to be much more similar data across the board than with hedge funds.<br /> Photo:Moni Sertel<br /> &nbsp;</p>
The myth of active hedge fund management
Hedge Funds
<p>A new academic study adds yet further proof to the growing mountain of evidence that "active management" is largely a myth, at least among hedge fund managers. Mikhail Tupitsyn and Paul Lajbcygier of Monash University in Australia highlight that not only are two out of three hedge fund managers actually "passive" in their investing approach, even those that are active managers at first tend to become passive over time.</p> <p>The authors also point out that passive managers tend to outperform active managers, especially over the long run.</p> <p>Read the details at ValueWalk.</p> <p>Photo: yuki55</p>
Video: High Frequency Trading hurts the little guys
Hedge Funds
<p>"Creating an advantage for to an institutional user or a particular type of trader that disadvantages the retail investor is bad for the country, bad for the markets, and bad for the business," says Dick Grasso, former NYSE chairman and CEO. "The structure of the market today for major securities has been terribly hurt," Grasso says on Wall Street Week. The complex markets have become less transparent, hurting the average retail investor.</p> <p>&nbsp;</p>
Why China is like the movie Predator
Hedge Funds
<p>Investors are no doubt full of quirky analogies they can employ to describe their experiences of China, but perhaps the best comes from Russel Clark, the CIO of hedge fund Horseman Capital, who recently compared China to the 1987 sci-fi action movie Predator.</p> <p>ZeroHedge reports that Clark offered up this gem in his firm's monthly letter after the $2.5 billion fund was up a staggering 9.4% for August following China’s market rout. </p> <p>Clark recalls how the film features a special ops team ordered on a mission to a South American jungle, that are slowly hunted down by an alien creature. </p> <p>They try to trap the creature, but it defies anything they have seen before: it can turn itself invisible, has infrared vision, and uses a shoulder mounted laser rifle. Nearly all of them succumb to the Predator.  </p> <p>The explanation is long and can be read here. In short, for bears, the Chinese government is like the Predator: continually using special abilities that were previously unknown. Bearish investors meanwhile have been picked off relentlessly and effortlessly by the government and the central banks. </p> <p>But things have unraveled since. The stock market began to sell off and pressure  built on the currency, prompting the Chinese to devalue the renminbi. This had the unwanted effect of stoking fear in the investing public, increasing  both capital outflows and pressure on the exchange. Clark concluded his analogy:<br /> “In my experience, in the mind of the international investment community, small devaluations tend to encourage even more capital outflow, which in turns leads to even large devaluations. Or to borrow, a line from Predator, 'If it bleeds, we can kill it'.’’<br /> One wonders what other movie analogies work to describe the Chinese economy. <br /> Photo: Malte Sörensen</p>