“When the philosopher points at the moon, the fool looks at the finger.” — Classic Buddhist proverb
2016 Hedge Fund Letters
Hedge fund assets pass $3 trillion in 2016 for first time
Relying On Old-Fashioned Stock Picking, Lee Ainslie Reports His “Strongest Quarter” Ever
Lee Ainslie's Maverick Fund USA enjoyed its "strongest quarter in the fund's history" during the three months to the end of June. According to a copy of the firm's second-quarter letter to investors, which ValueWalk has been able to review, Maverick Fund USA gained 18% in the second quarter. Following this performance, the fund was Read More
Struggling hedge funds still expense bonuses, bar tabs
Investors are starting to sour on the idea of reimbursing hedge funds for multi-million dollar trader bonuses, lavish marketing dinners and trophy office space. Powerful firms such as Citadel LLC and Millennium Management LLC charge clients for such costs through so-called “pass-through” fees, which can include everything from a new hire’s deferred compensation to travel to high-end technology. It all adds up: investors often end up paying more than double the industry’s standard fees of 2 percent of assets and 20 percent of investment gains, which many already consider too high. Investors have for years tolerated pass-through charges because of high net returns, but weak performance lately is testing their patience.
Defenders of pass-throughs said the fees were necessary to keep elite talent and provide traders with top technology. They said that firm executives were often among the largest investors in their funds and pay the same fees as clients. But frustration is starting to show. A 2016 survey by consulting firm EY found that 95 percent of investors prefer no pass-through expense. The report also said fewer inves-tors support various types of pass-through fees than in the past. “It’s stunning to me to think you would pay more than 2 percent,” said Marc Levine, chairman of the Illinois State Board of Investment, which has reduced its use of hedge funds. “That creates a huge hurdle to have the right alignment of interests.”
Here are a few ways that investment industry participants can better get along.
Investor Expectation #1: My fund managers should never lose money.
Reality: I’ve said it before and I’ll say it again – Continuous outperformance is a myth. No fund manager walks on water, is always right at the right time, or is even always right. No money manager can control for the unknown unknowns, and occasionally even the known un-knowns can bite them in the tushie. The key is not to look for managers who never experience a drawdown (um, let’s remember money manager Bernie Madoff only posted one loss in his career) but for fund managers who can mitigate, manage, and learn from losses, as well as be candid and proactive about addressing them.
Money Manager Expectation #1: My fund is AWESOME and yet no one gives me money. Jerks.
Reality: Your fund may be awesome, but if you aren’t getting assets, there has to be a reason. Maybe you don’t have the right network. Maybe you’re not targeting the right investors. Maybe your strategy isn’t in vogue right now. Maybe the investors you’re targeting are fully committed at the moment. Maybe you don’t mind a fair amount of volatility but other folks do. Maybe you have more faith in your simulated track record than others. Maybe you’re just too small/don’t have the right infrastructure at the moment and therefore folks can’t commit meaningful capital. The list of reasons why you’re not getting capital can be endless. Rather than dwelling on how short-sighted investors must be to overlook your fund, perhaps the best use of time would be figuring out why assets aren’t flowing in your di-rection and developing a plan to address those issues.
Investor Expectation #2: Money managers shouldn’t make money from the management fees.
Reality: While it’s generally accepted these days that a fund’s management fee shouldn’t be a bonanza annuity for any manager, it is also generally accepted (though sometimes forgotten) that running an investment fund takes moola. You have to be able to attract and pay talent a base salary in good times and bad. You need ample staff for your particular investment strategy. You may need research, IT, and other services. You’ve got to keep the lights on, the firewalls up and disaster recovery plans in place. How much this costs depends on strategy, location, number of investors, staffing requirements and a host of other factors. It’s up to the fund managers and investors (dur-ing due diligence) to determine a fund’s true “bottom line” and pay fees accordingly. Rarely will they be “zero.”
Money Manager Expectation #2: Investors should have infinite time to talk to me about my fund.
Reality: There are generally eight to 10 hours in an investor’s working day. The investors that I speak to often get 20 to 100 emails and calls a day from fund managers. You start doing the math. Oh, and make sure you factor in committee meetings, travel, PowerPoint presentations, conference calls, HR, compliance tutorials, and bathroom breaks. Now do you understand why it took Issac Investor a few days (or a few emails) to get back to you? Or why they only want to chat for minutes, rather than hours, about your fund? To quote The Karate Kid, “Patience, Daniel-San.”
Investor Expectation #3: There’s only one way to be “institutional.”
Reality: As much as we want a “check the box” solution for fund evaluation, it will never exist. Just because a fund manager has a full time Chief Compliance Officer, Chief Operations Officer, Chief Financial Officer, and Chief Information Officer doesn’t necessarily make that fund better than one that has combined or even outsourced some of those functions. Different levels of staffing and infrastructure will be appropriate at different stages of fund evolution and for different strategies. The key is to determine if key functions are covered ade-quately, not to count C-Suite professionals in the org chart.
Money Manager Expectation #3: Anyone can be a fund marketer.
Reality: Some folks are great at initiating contact with investors, making a concise and compelling case for a fund, pushing gently for fol-low up and asking for (and getting) a commitment. Some people aren’t. If you aren’t one of those people (see also, Money Manager Ex-pectation Number 1), even if it is your fund and you know it better than anyone else ever could, you should consider delegating those tasks.
How Bridgewater measures employees
Hedge funds start 2017 on positive notes
Hedge funds continue to perform well out of the gate in 2017, following up strong performance in 2016, according to the just-released eVestment January 2017 Hedge Fund Performance Report. The industry started off 2017 with an average +1.16%, with more than 70% of hedge funds reporting positive results for the first month of the year. In fact, despite some disappointing performance in a few hedge fund segments, industry results show the importance of using data and market insight to pick the right hedge funds and the importance of hedge funds to a balanced portfolio of investments.
Some interesting points from the January report include:
- Brazil focused hedge funds produced the strongest returns in January, coming in at +7.72%. This follows exceptional +31.14% returns in 2016 but disastrous -29.62% returns in 2015, according to eVestment data, highlighting the tremendous upside and potential vola-tility in some hedge fund segments.
- Funds focused on the other BRIC countries performed strongly in January, with Russia-focused funds returning +4.10%, India-focused funds returning +4.21% and China-focused funds returning +4.17%. Overall emerging markets-focused funds returned +3.37% in January.
- Among primary strategies in January, Long/Short Equity and Distressed funds were among the stronger performers, returning +1.59% and +1.57% respectively.
- Activist hedge funds, among the strongest performing segments in 2016 with +11.91% returns, started the year off positively, though muted compared to last year, at +0.99%.
- Primary strategies with the weakest performance in January were Macro funds, which returned -0.33%, and Managed Futures funds, which returned -0.74%.
Article by Bruno J. Schneller, CAIA & Miranda Ademaj – Skenderbeg Alternative Investment
See the full PDF below.