I hate it when reporters write stories about how hedge funds are under performing the stock market. Most of these funds are not benched against the stock market, and the fact that their returns are lower than the more volatile stock market only matters to rich dentists who chase the hot asset of the month.
But I do think it is a big deal when these hedge funds lose money. These hedge fund managers are supposed to be the smart ones. Under performing the S&P 500 is one thing – having a negative return is quite another.
Therefore I found the details from a recent WSJ article quite interesting:
Some of the biggest investors on Wall Street are losing money with wrong-way bets in markets around the globe, a surprising black eye amid a rise in stock and bond prices. Hedge-fund managers including Paul Tudor Jones, Louis Bacon and Alan Howard are among those who have misread broad economic and financial trends. Some have lost money as Japanese stocks fell, while others have been upended by the surprising resilience of U.S. bonds. An unusual period of calm has exacerbated problems for many trading strategies dependent on volatile markets. The losses by these so-called macro investors are contributing to a trading slowdown hurting the largest investment banks. The flagship fund at $15 billion Moore Capital Management LP, led by star investor Mr. Bacon, was down 5% this year through the end of May, the firm has told clients. Mr. Jones’s flagship fund at $13 billion Tudor Investment Corp. is down 4.4% this year, according to a person familiar with the firm. Funds operated by Mr. Howard’s Brevan Howard Asset Management LLP, Fortress Investment Group FIG –1.95% LLC, Caxton Associates LP, Discovery Capital Management LLC and Balestra Capital Ltd. also have posted losses, according to people familiar with their performance. Kyle Bass’s $2 billion Hayman Capital Management LP has lost money on wagers against some European countries, as well as a bet on further weakening of the Japanese yen, people familiar with the firm say. The Dallas-based firm’s main fund suffered its steepest two-month drop in five years at the start of the year and fell more than 6% in the first quarter, these people say.
These are some big names getting destroyed. Down five or six percent in a quarter doesn’t sound like a lot for a day trader in his underwear flipping stocks in his basement, but for these hedge funds, it is a disaster. These funds are sold as absolute return vehicles. They aren’t supposed to hit it out of the park with 50% or 100% type returns, but neither are they supposed to lose. You give up the big win for the certainty of little wins.
I have long argued that these hedge funds are the new consensus. There are simply too many of them chasing too little alpha. To make matters worse, they even create their own mini bubbles in a twisted game of hot potato.
Therefore it does not surprise me one iota that these hedge funds are finding it difficult to generate positive returns. Without a big theme like the 2013 Japanese Yen slump to line everyone’s pockets, there are not enough good trades for them to all make money. So they are sit around in a circle shooting at the target in the middle.
I continue to use them as a contrary indicator. Even though their pedigrees are much more impressive than mine, I find that their calls only lose you money.
Let’s have a look at the recent market moving David Tepper comments:
S&P 500 Index over the last month</a> </div></p>
I don’t mean to pick on Tepper – I actually really like the guy. And Tepper’s recent high profile divorce certainly can’t help by adding even more stress to the pile. (As an aside, I fully agree with the theory that you should avoid managers that are going through emotional personal problems. Whether it is a sick family member or an ugly divorce, trading is a game that requires an emotionally level head and personal stress is only going to make the trading game all the more difficult).
It is therefore no surprise that Tepper’s public comments have so far only cost you big money. My suspicion is that his “my concerns have been alleviated” CNBC update might have been within a day of top ticking this early summer risk rally. I think that Tepper represents hedge fund consensus.
The hedge funds increased long positions are confirmed by the recent JPMorgan chart:
Hedge funds are now longer than any point over the last 3 years.
There is no doubt that bull markets can last longer than anyone (most especially the bears) anticipate. However, do you think that it is a good idea to be following a group of managers who have all produced negative returns so far this year, and are now deciding to chase the stock market?
S&P 500 over the past 5 years</a> </div>
Climbing aboard the hedge fund consensus long equity trade makes about as much sense as climbing into the car with this guy.
I will continue to fade CNBC Hedge Fund Guru headlines. I think they only cost you money, and in fact, represent the new “dumb money” consensus. Actually that’s probably a not a good way to put it. They are not dumb by any means. But maybe they are too smart for their own good…
Don’t count on Maverick
This morning everyone is focusing on Iraq and the ongoing escalations in the Middle East. I continue to believe that the geo-political situation has taken a dramatic turn for the worse during the last few months. We have three hot zones that could easily spin out of control at any point. Between Iraq, Ukraine and China, the chances of a serious geo-political conflict have risen dramatically.
In case you missed it as you focused on the flurry of news about Iraq, the situation in China continues to escalate. It was recently reported that:
A Chinese warship in the East China Sea is thought to have activated fire-control radar, a prelude to opening fire, to track a Japanese Maritime Self-Defense Force vessel and patrol plane on May 29, government sources in Tokyo said. Fire-control radar is designed to calculate things like elevation, range and velocity to ensure a direct hit on an enemy target. The application of FCR could be interpreted as a provocative act. But since there is no conclusive proof that the Chinese actually used the radar, the Japanese Defense Ministry has yet to officially comment on the matter.
Don’t forget that this sort of missile lock is what made Cougar turn in his wings and let Maverick and Goose slide into the his spot at Miramar.
I am not sure if there is a Japanese “Maverick” waiting to save the day.
The problems in Iraq and Ukraine are obvious and easy for everyone to see. But don’t dismiss the increased aggressive tactics out of China. The potential for a mistake that leads to an out of the blue conflict is much higher than most realize.
Between these three hot spots, the markets are increasingly blind to the increasing risks. Don’t just count on Maverick and Goose saving the day. Maverick is too busy with Scientology and Goose died in a flat spin that could not be prevented.