Tim Bennett Explains: Why hedge funds are having a hard time
Published on Aug 12, 2016
Volatile markets should be great news for hedge funds and yet many are struggling. This week I sum up why and the lessons for investors.
What do you think chime in below? Also see our latest hedge fund letters
0:10welcome to this killing explains finance video this week
0:15what’s going wrong for hedge funds now it is going wrong
0:19industry insiders are saying things like frankly I’m blown away by the lack of
0:23talent the 3d model is broken and the whole sector is just unbelievable
0:29so what’s going on well first of all a quick reminder what hedge funds they are
0:33not defined by law which makes it a bit tricky to say this is a hedge fund but
0:37essentially they share certain features they can be open or closed ended they
0:41can be available to the public or not available to the investing public on top
0:45of that they are funds characterized by the strategies they adopt they tend to
0:50follow strategies that conventional funds either won’t or can’t hunting for
0:54opportunities to make money hopefully we’re competitors haven’t spotted the
0:58opportunity yet they use strategies recovering other videos labeled grandly
1:03as long short relative value macro event-driven and they pursued them using
1:09risk so they’ll tend to be able to bet on prices falling as well as rising
1:12short-selling and they use derivatives on top to basically basically they
1:17compile a lot of potential money at a small opportunity pennies in front of a
1:23steamroller if you will now it’s the mystique around hedge funds that’s
1:27worked in their favor so far but is working against them now there are six
1:31reasons why hedge funds will stay in the news this year possibly for the wrong
1:35reasons
1:35performance is the big one so far 2016 has been the worst year since 2000
1:40annoying hedge funds according to bloomberg outflows of totaled around 15
1:45billion US dollars average performance is a drop of . seven percent and that’s
1:51coming from an organization only looks at survivors let alone the funds that
1:55failed didn’t make it into the stance and some of the biggest names in the
1:59business are down fifteen percent or more just in 2016 clearly
2:03underperforming even boring old indices like to put 100 or the S&P 500 second
2:10criticisms fees so not only agents underperforming they’re charging
2:14handsomely for doing zone most funds have a structure that charges now your
2:18management fee and a performance be typically the top 12 B 1 to possess
2:24about this and the management and that one could be anything but as a ten to
2:27twenty percent of performance over a benchmark they select so just quick look
2:34at what that means that basically means very kind of win-win as hedge fund
2:37managers because let’s say a fun takes a two percent annual management fee and
2:41twenty percent of the performance over a benchmark that is chosen and its current
2:46nav is a hundred million alright if it manages to increase the NAB by 20
2:52million and the benchmark is looking at rises 10-percent how much ritual those
2:57managers be potentially well a healthy 2.4 million that’s assets and the
3:02management 2% of the new NASA value plus a performance fee of twenty percent of
3:07the bit they’ve achieved about the benchmark adds another two million nice
3:11work you get it but they win just less grandly if you like even at the NAD
3:17doesn’t move say stays under million and the benchmark rises ten percent because
3:21then they can still justify taking out the annual fee that’s based on assets
3:25under management with their eyes or for that just may not get a performance the
3:29and if just give you a third scenario nab actually falls the benchmark rises
3:3520-percent they’ll still take out the AUM that’s how I am to work the
3:40performance fee is debatable some of the more less or less scrupulous plans will
3:44take a performance be others world third secrecy
3:49now people don’t mind a bit of secrecy if they can see any funds beating the
3:52market making lots of money but they hate it when they can’t
3:55and whilst headphones used to say what we can tell her what we’re doing because
3:59everyone will copy asst investors are kind of getting tired of that line they
4:02want to know what’s going on in the black box wanna call it that for this
4:07competition the Lord diminishing returns hedge funds have grown massively the
4:11sector’s rapidly expanded and I’m afraid like any sector does that gets harder
4:15and harder and harder for your entrance to actually make a mark and find those
4:18opportunities because everyone else is doing the same thing and that means the
4:22electrons are struggling to find you tell intense the quote the start of this
4:25video and they’re struggling for new ideas be able to begin to wonder how can
4:30they stay ahead of the field
4:31and they’re so large and such a big part the market now tough markets this is
4:38important hedge funds are just not reading things correctly central bank
4:41action at the moment it’s really hard to predict the hedge funds are no better
4:44than the rest of us
4:45China’s slowdown is hard to measure engage in a lot of fun got caught out
4:49when trying to bounce fairly recently the dollar is foxing lot more a lot more
4:53funds and markets and just got more volatile and hedge funds were in there
4:57say oh this is perfect for us
4:59volatile difficult to read markets where the experts with rocket scientist
5:02we’re making more money people would say great but they’re not all the evidence
5:06suggests the hedge funds are reading the markets bad as everyone else and just
5:09chucking more money trying to make money from the situation then there’s risk
5:14short selling is at all available hedge funds
5:17it’s very very risky if you get it wrong and the use of derivatives can magnify
5:23losses as well as prophets the problem that goal is the in volatile markets the
5:27price of insurance goes up price of options contract rises it gets harder
5:32basically to make money some of the traditional ways that hedge funds like
5:36to so for all those six reasons hedge funds are struggling and I think may
5:40well don’t continue to struggle over the course of this year some about another’s
5:44selection is vital and try to find out as much as you can about what’s going on
5:49is vital to any questions editor acrylic calm and if you want to any other videos
5:55related to hedge funds please do go to the website kickstarter.com have a look
6:02and the investing principles tab and you’ll find a video all what makes hedge
6:06funds different
