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Hedge Funds which are really Money Managers have become Dumb Money (Video)

So called “Hedge Funds” who employ no real hedge fund strategies for the majority of their allotted fund capital are really just marketing themselves as Alpha Players to charge the 2 and 20, when based upon performance and trading strategies deserve just the 1.5 to 2% money managing fee of standard money managers.

0:00good morning this is econ matters it is jun 2015 2016 so next week is the end of
0:07the second quarter after some initial weakness and markets to start the week
0:11expects buying to sort of close out the second quarter
0:16we’ll see if that comes to fruition
0:19so he knew edge has this top one under the hedge funds corded 2016 according to
0:25Berens household hedge fund name such as bill ackman’s pershing square Daniel
0:32Loeb’s Third Point Capital and David on horns greenlight capital nowhere to be
0:35found in the Barents 2016 list of best and attachments
0:41that’s just the muses me a lot so first of all
0:46pershing square Third Point Capital and greenlight capital or not
0:50hedge funds I know they market themselves so it’s sort of
0:55yeah we provide alpha so the sort of market themselves for the two and twenty
1:00but they’re not hedge funds they don’t usually they may have a small portion
1:07that
1:09what I call employee you know your standard hedge fund type strategies
1:16these are money management firms but that being said his barons notes even a
1:24wall street the name of barons penta number one hedge fund this year is one
1:28that many serious investors would recognize parametric management a small
1:33hong kong-based firm posted a three-year compound annualized return in nearly
1:37thirty percent by the end of 2015 about double the return of the S&P 500 index
1:43remarkable gain forty-five percent in 2015 is occasionally fight market help
1:49the stock focus clients at parametric global master finally kicked its butt
1:53from its previous ranking appropriate for The Times parametric ignores
1:58fundamental analysis entirely and instead specialize in stat arbitrage
2:02strategy that relies on quantitative analysis to identify instantaneously
2:07miss price asset prices anywhere in the world
2:10I think Jim Simmons flagship Renaissance medallion fund these market neutral
2:15funds feed on the kind of instability and dispersion prices that overtook
2:19markets for much of 2015 the US Europe Europe and especially emerging markets
2:24some more details on this year’s where the hedge fund was found in 2009 by
2:30Zhang Li you
2:31after earning a PhD in finance from the university of illinois at
2:35urbana-champaign work briefly a hedge fund deephaven capital
2:40he then joined nomura securities international its proprietary equity
2:44trading unit
2:45eventually became a managing director and senior portfolio manager at Israel
2:50Englander’s 34 billion millennium international management
2:55ranked number 92 which spreads its money over variety of strategies including
2:58statistical arbitrage parametrically which will reportedly has an asian focus
3:04fun in the works is said to run some millennium money
3:07parametric curves rise to the top in a world in which a little financial logic
3:12makes sense is not unexpected last year substantial volatility fuel the return
3:17of the quantity leading performer Service says eric siegel head of hedge
3:21fund research and management city private bank in New York
3:24even the same asset classes offered disparate outcomes for instant bond rate
3:29mostly fell but will relate junk bonds got cream
3:33this helped make distressed securities off more than ten percent the
3:36worst-performing hedge fund strategy last year according to Barkley head
3:40research
3:41so here’s the actual and
3:47bigger font so you can read the thing that you should take away from this list
3:52is most of these guys are really small or small portions within bigger funds
3:59and that’s one of the tricks or the deep hidden secrets
4:06well I guess it’s not that deep in but it’s not advertised when people are
4:11raising money right from pension funds and fund of funds etc is that the bigger
4:20you get a lot of strategies
4:23just don’t work because you end up moving the market so the smaller firms
4:29of the ones that can get the higher returns but there’s an offset set
4:34because you look at this article write more
4:38hedge funds shuttered then started in first quarter and so we not who they are
4:43going to be the winners vs who are going to be the losers
4:47especially when your pension fund trying to allocate money it can be quite
4:52dangerous
4:53you know and that there is statistics and data that they can use and look at
4:59their three-year audited returns and some of the ratios to see how much
5:05volatility to have etcetera but generally they would prefer to just
5:11that’s why they often put and
5:15a lot of these big funds allocate their money to the big names money managers
5:20because they just feel more comfortable like that and also these guys are
5:26raising money so they have the infrastructure in place to make the
5:30sales call the presentations to bring in the money
5:34where is a bunch of these smaller guys just don’t have that infrastructure but
5:38a lot of these since so the given that that is the case and has been proven
5:46probably over the last 20 years of modern finance theory that the bigger
5:52you get the less nimble you are the more you sort of morph into a money manager
6:02and the more you sort of morph into passive dumb money and the smaller you
6:07are the more nimble of the more aggressive you can be the less likely
6:12chance that you’re going to move the market and much more higher alpha return
6:16and so really if they had the staff on hand a lot of these pension funds to
6:23analyze and then they can outsource this and there’s a whole industry of being
6:28able to provide the service for pension funds etc
6:33- then allocate the funds for them but to disperse instead of big blocks money
6:39too
6:40separate that into much smaller chunks and diversify it over a bunch of these
6:46smaller firms and they come out a lot better in the long run and I see that is
6:54a trend going forward so dumb money and smart money in the parlance of Wall
7:02Street there’s the smart money in the dumb money the dumb money falls for
7:05investing fads cells into market panics and Paige ridiculous fees
7:11the smart money doesn’t
7:14what a lot of these big good money management firms that market themselves
7:20as hedge funds to sort of get the two and twenty or to appeal to the two and
7:25twenty because when you think about it
7:28a money manager gets two percent
7:31hey 1.5 they can even begin negotiated down to one point five percent so two
7:37percent versus – 20 is a big deal so you wanna you know I provide alpha
7:43I’m providing genius I’m not just a passive money that’s basically the
7:51market so whatever the market does
7:53that’s what we do we’re not going to outperform they’re not going to
7:57advertise themselves or market themselves in that regard to give you a
8:01little story my high pitched an idea to david einhorn’s firm about six months
8:08ago
8:10i would say that just from an observation standpoint to stand back
8:15people I dealt with their very smart very ply nice people but they seem a
8:25little very now they had a bad year last year so they’re probably a little
8:30cautious but they seem to be slow so it took them a long time to evaluate an
8:36idea they were very cautious
8:41and they didn’t they didn’t seem to be good at analyzing different sort of
8:48investment themes
8:49so you know that test we have blocks and you know which or basically an IQ test
8:58so which isn’t like the other even within an investment landscape they
9:05didn’t seem to be very good at that
9:07and so that’s a very important skill to have on Wall Street to understand sort
9:13of take a sector right
9:15you have to know which of these is the overall sector bad or is there
9:21difference within that sector and to be able to differentiate between two ideas
9:26that are very similar
9:28so they could even let’s just call it to stocks that fit into the same genre
9:32realm or type of company but to be able to evaluate which is the one to take
9:36versus the which one you shouldn’t do they seem very bad at that
9:41and I was struck by some of their analysis that and overall they’re pretty
9:48sharp guys but I was struck by the fact that they couldn’t differentiate between
9:53the quality of two different companies within the same sector and that
9:59I was like pretty obvious to me
10:02the differences and you see some of their holdings
10:06they’ve had in their portfolio it’s very much that hey we’re money managers were
10:12passive we have a lot of funds to invest that we have to stick it somewhere so
10:16we’re going to stick it in apple and it’s basically doing nothing and apple
10:22but we’re going to stick an apple and so my basic criticism of them now they pass
10:32on the idea and it did exactly what I said it would do it doubled within three
10:37to six months but I basically told them you guys need to be ready to go on this
10:43monday morning so you need to do your due diligence and be ready to take this
10:47seriously work all weekend on this and be ready to go monday at you know six in
10:54the morning because this is a no-brainer
10:56you’re getting a no-brainer price you’re going to be a freeroll this and they
11:01were just way too slow to react and you just you just give them what money away
11:05because you can freeroll ideas and what I mean by this is so this stock
11:10basically was at the ridiculous price so it didn’t matter you have two ways to
11:16win and that’s what you want that’s what I look for an ideas we have two ways to
11:19win
11:20so even if it the idea is a total failure you’re going to win and if it
11:26does what I say it’s going to do you’re going to double your money and so
11:29literally and I understand market tricks market structure and I knew they would
11:37try to push it down one more time monday the first move would be down to clear
11:41out any stopped before taking it up and sure enough your best price was to get
11:46the pre market or the opening play
11:49monday morning and then you had to dollar profit that day and you free roll
11:54it for the rest of eternity because you put your stopped up a dollar
11:58and you free rule the entire play and so they passed on it
12:02it doubled in 36 months it when another
12:07I don’t know twenty thirty percent above that
12:10so it was just a home run and they couldn’t differentiate that it was a
12:15home run and it took them too slow to recognize that they could freeroll the
12:20entire trade and so that’s the sort of definition of dumb money and that’s why
12:29money managers have become just passive obese just dinosaurs

Hedge Funds