As well-known hedge fund luminary Paul Tudor Jones closes the doors its Tudor-Tensor fund, Attain Capital notes the issue isn’t so much performance as it is asset raising and investors piling in at the top and getting out at the bottom.
Performance not bad as fund exits
Since its inception in 2005, the Tudor-Tensor managed futures fund has generated 41.86% for investors – handily beating the benchmark Newedge CTA index, bonds, and the worldwide stocks, but falling slightly behind hedge funds and US stock returns over the same period.
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What Attain points out in their article, “What a Hedge Fund Failure Looks Like,” is the failure of Tudor-Tensor was more about the often counter-intuitive process of investing in alternatives.
Sell at equity highs, buy on a drawdown
After noting that managed futures detractors will likely use the high profile demise of the Tudor-Tensor fund as a rallying point that the managed futures indices suffer from a horrible case of survivorship bias – while at the same time noting that the Dow Jones Industrial Average suffers adjustments in index components not that different yet seldom questioned by the Wall Street street gang that typically piles on top of managed futures. In fact, Attain notes that the “failure” of Tudor-Tensor doesn’t look that bad at all.
Over the past three years, as the US Federal Reserve manipulated markets along the yield curve, repressing price trends, trend following funds suffered. During this time, Tudor-Tensor was down 20%, in line with many of their managed futures trend following peers.
“The relative performance (of Tudor-Tensor) wasn’t all that bad, with Tensor outpacing their benchmark (managed futures) as well as the markets they track (commodities) as well as a few little known asset classes called Bonds and World Stocks,” they wrote in a blog post.
The game of hedge fund asset raising
Then Attain touched on the real issue: the game of asset raising in the hedge fund world. “The real story here isn’t really how this program performed or that Paul Tudor Jones can’t cut it in managed futures, the real story is the business side of the hedge fund business,” they wrote. “I have no doubt that Tudor and their team believe this program will perform over the long-term and that this point likely marks a low for the model. But big hedge funds like Tudor know how the asset gathering game works.” Attain points out that the real issue was the declining asset base in the fund.
Noting the asset flows of the Tudor-Tensor fund, Attain highlighted the fact that a large chunk of assets came into the fund at the same point when it was reporting new equity highs.
“The real story is that nearly $700 million came flying into the fund on 4 years of good performance and the Tudor name almost exactly at the wrong time. The real story is the same story we’ve heard a million time and see play out again and again with mutual fund flows and the rest – investor’s getting in at the top, and out at the bottom,” Attain wrote. “This is nothing new to those in the investment industry – and goes to show that even a hedge fund ‘brand name’ like Tudor isn’t immune from performance chasing.”
As the US Federal Reserve appears to be normalizing its quantitative easing – a manipulation that ultimately impacts more than bond yields, but also the US dollar and every market around the world – the return of normalized market trends could bring about a renaissance in the uncorrelated asset class.
“The bottom line for a multi-billion shop like Tudor is that a $100 million fund is simply not worth the time and effort to keep going, no matter how well they think it will perform moving forward,” Attain noted. “The playbook on the business side of hedge funds is to shut this one down, and move on to the next project.”
(Graphics used in this report from Attain Capital.)