In a new blog post, Larry Swedroe rips into John Hussman, a former economics professor at the University of Michigan and founder of the Hussman family of mutual funds, sometimes hitting below the belt.
Hussman’s apparent sin is concern for market risk in the current US Federal Reserve stimulus driven economic environment.
Larry Swedroe points out Morningstar’s rating for the mutual fund
Telling his readers “to ignore his forecasts because they don’t have any value,” Swedroe pointed out that Morningstar gave the mutual fund a one star rating, which has led to 61 percent of funds not lasting another ten years, based on a study of such things.
Hussman operates a long / short relative value strategy that, in a rising stock environment, has found difficulty. In his take-down, Swedroe noted that for the ten year period ending August 1, 2014, Hussman managed to lose 1.3 percent per year on average. This trails the S&P 500 index badly, which returned 8 percent to the good on average over the same reporting period.
As a result of the performance, Swedroe notes investors have been disserting from what is painted as a sinking ship. As of Aug. 4, 2014, the fund had $1.1 billion in assets, Swedroe notes, “less than 40 percent of what it had just 19 months earlier—as investors fled, unhappy with the poor performance.”
Swedroe highlights investments correlation with positive economic outcomes
Swedroe, who has authored books on alternative investments that highlighted investments primarily correlated to positive economic outcomes, notes what is considered a pretty standard description of a hedge fund long / short strategy. According to the Hussman web site, the strategy is reasonably clear:
“The investment seeks to achieve long-term capital appreciation, with added emphasis on the protection of capital during unfavorable market conditions. The fund’s portfolio will typically be fully invested in common stocks favored by the fund’s investment manager, except for modest cash balances that arise due to the day-to-day management of the portfolio. When market conditions are unfavorable in the view of the investment manager, the fund may use options and index futures to reduce its exposure to general market fluctuations. When market conditions are viewed as favorable, the fund may use options to increase its investment exposure to the market.”
“Almost sounds like a hedge fund, doesn’t it?” questions Swedroe. “And it’s produced returns just like the typical hedge fund.”
Swedroe attacks average hedge fund performance
Swedroe then attacks average hedge fund performance, nothing how the HFRX Global Hedge Fund Index returned 1.1 percent a year, “far worse than the performance of every single major equity asset class over that period.” (While this is true, considering just the top hedge funds based on asset size hedge fund returns can be much better than this average.)
While Swedroe throws a few platitudes towards Hussman, his conclusion is basically scathing.
“The market has already priced the risks on which Hussman bases his analysis. He just believes he’s smarter than the collective wisdom of the market,” Swedroe writes, then he implies that Hussman is intentionally misleading. “Or, at least, he wants you to believe he is, even if he knows better. The only problem is that the evidence, including his own track record, demonstrates that investors are best served by ignoring his opinions.”
That’s the thing about a stimulus driven market environment working inside a debt crisis. It can mask the real issues underneath the surface. The Hussman’s of this world will have their day – when the market crashes. Until then, Hussman just takes his punches from Swedroe.
Read the full Swedroe article here.