Category: Hedge Funds

Hedge Fund Launches Are Surging

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In the first quarter of 2021, 189 new hedge funds were launched, the highest number since the end of 2017, according to data from Hedge Fund Research.

In the fourth quarter of 2017, 190 hedge funds were started. Since then, the number of launches has been consistently lower, hitting its lowest in the first quarter of 2020 with a total of 84 launches and 304 liquidations.

“The only ones that did get launched [that quarter] were before March,” Kenneth Heinz, president of HFR, told Institutional Investor.

Heinz attributed the newfound surge in launches to three factors: performance, inflation, and risk aversion. According to a statement, the top decile of hedge funds tracked by HFR gained 126.8 percent in the 12-month period ending in the first quarter of 2021. In this quarter alone, the top decile gained 29.7 percent.

Institutional investors are also looking to hedge against inflation, Heinz said. “As the world emerges from the lockdown, inflation is present, and it will continue to build,” he said. “The different strategies provide great protection from inflation.”

These strategies include equity hedge funds and event-driven funds. As of the first quarter of 2021, the greatest portion of industry assets — 30.42 percent — were invested in equity hedge funds. Event-driven funds came in second with 27.53 percent of total industry assets.

Heinz said these particular strategies are appealing to investors because they provide exposure to some hot “meme” stocks. Plus, as the world emerges from a global quarantine, he said there is a large appetite for strategic activity in mergers and acquisitions — a strong point for event-driven funds.

Since the first quarter of 2020 and the onset of the Covid-19 pandemic, Heinz said investors have left their risk complacency in 2019. Heinz said 2019 was a “super beta year,” prompting inventors to worry less about risk and more about returns.

“I liken 2019 to the easiest year in the world to make money because everything went up,” Heinz said. “But then March reminded investors they had become complacent about risk.”

As they move into the new year and recover from the pandemic, investors have taken more defensive positioning against risks that were overlooked in 2019. As for the future of the hedge fund industry, Heinz said he believes the market has entered a period of expansion.

“Even though the markets have recovered and they’ve gone back to record highs, I think institutions that are allocating are still very much more cognizant of risk than they were prior to the first quarter of 2020,” he said. “I think that’s the reason that you’re seeing more capital inflows and more funds launching.”

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By: Jessica Hamlin

Source: Hedge Fund Launches Are Surging | Institutional Investor

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Critics:

A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction and risk management techniques in an attempt to improve performance, such as short selling, leverage, and derivatives. Financial regulators generally restrict hedge fund marketing except to institutional investors, high net worth individuals and others who are considered sufficiently sophisticated.

Hedge funds are regarded as alternative investments. Their ability to make more extensive use of leverage and more complex investment techniques distinguishes them from regulated investment funds available to the retail market, such as mutual funds and ETFs. They are also considered distinct from private-equity funds and other similar closed-end funds.

As hedge funds generally invest in relatively liquid assets and are generally open-ended, meaning that they allow investors to invest and withdraw capital periodically based on the fund’s net asset value, whereas private-equity funds generally invest in illiquid assets and only return capital after a number of years. However, other than a fund’s regulatory status there are no formal or fixed definitions of fund types, and so there are different views of what can constitute a “hedge fund”.

UK Hedge Fund Reportedly Plans To Invest $84M In Crypto

The firm’s co-founder Alan Howard already has a personal stake in One River Digital Asset Management’s crypto ventures.

Brevan Howard, a United Kingdom-based asset management firm, is reportedly planning to directly invest in digital assets after more than a year of exposure to the crypto space.

According to a Bloomberg report, Brevan Howard Asset Management will be allocating 1.5% of the $5.6 billion in its main hedge fund to crypto — roughly $84 million. A source with knowledge of the matter said two co-founders of crypto investment firm Distributed Global, Johnny Steindorff and Tucker Waterman, would be leading Brevan Howard’s foray into crypto.

The asset management firm will reportedly be focusing on “a wide range” of cryptocurrencies in addition to Bitcoin (BTC), betting that the price of the crypto asset will continue to rise. At the time of publication, BTC’s price is $62,775, having fallen 1.3% in the last 24 hours.

The potential investment from a major hedge fund wouldn’t be the first time Brevan Howard has had exposure to the crypto market. The firm’s billionaire co-founder Alan Howard has a 25% stake with One River Digital Asset Management, a United States-based hedge fund that purchased $600 million worth of Bitcoin and Ether (ETH) last year.

Part of a seemingly growing trend among hedge funds, Brevan Howard is not alone in dipping its toes into crypto markets. In February, New York-based global investment firm M31 Capital filed paperwork with the U.S. Securities and Exchange Commission to launch a Bitcoin hedge fund. Billionaire hedge fund manager and philanthropist Ray Dalio has also called Bitcoin “one hell of an invention” and compared it to gold.

By: Turner Wright

Source: UK hedge fund reportedly plans to invest $84M in crypto

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Are Hedge Funds Too Big To Beat The S&P?

When I started my hedge fund career in 1998, the industry controlled about $200 billion in assets in 3,000 funds. Today, according to BarclayHedge numbers, there are between 10,000 and 15,000 funds investing over $3 trillion. But we seem to have lost a little something along the glorious speedway of growth. Performance, to be precise. As I looked back at the coming of age of hedge funds in the last twenty-something years, I couldn’t help but wonder: when it comes to performance, does size matter?

Not to be fastidiously historical, but from 1998 to 2008, hedge funds beat the S&P in seven out of eleven years, according to the Callan Institute periodic return tables. After 2008, they beat the index…once: in 2018, by 1.1%. Yes, for ten out of the last eleven years, the S&P has outperformed hedge funds, not by a little, but by a whopping 9.4%. I suspect that the poor showing of the hedge fund index is even understated, because it likely has a survival bias − meaning that the worst performing hedge funds go out of business and are not counted in ensuing years.

Why the consistently lackluster returns? My experience as a twenty-year investor in the high yield and distressed markets is that it is hard enough to have ten great ideas to invest $1 billion. When you invest $10 billion and you need a hundred great investments – unique and executable − it’s mission impossible. Call me a fatalist, but invariably the top ten are great, the next ten conceivably good, and so on…until the bottom of the barrel is simply lame. Why not invest more money in the top ten ideas? Because of size limitations: ten distressed situations large enough to invest $1 billion do not systematically exist, at least not without considerably moving the price.

Admittedly, distressed investing, a sub segment of the alternative investment landscape, is a niche market that simply may not accommodate the current size of hedge fund assets. And mine may only be an anecdotal experience. But the same opinion has been publicly voiced by several legendary investors in different markets.

In 2016, speaking at the Milken Investment conference, Steve Cohen of Point72 declared that there were “too many players out there trying to do similar strategies”. Dan Loeb wrote in his investment letter the same year that we were “in the first innings of a washout in hedge funds and certain strategies.” Since then, the industry has added almost $1 billion in assets. A superior intuition tells me, however, that both investors referred to the demise and shortcomings of others – their own fund would continue to grow and thrive. Recommended For You

But what if you could extrapolate the question to the entire hedge fund industry, as one asset class, in an analytical rather than subjective manner?

I came upon a fascinating study by Marco Avellaneda, director of the Division of Financial Mathematics at the Courant Institute of New York University, who presciently asked, back in 2005: “Hedge funds: how big is big?” The first concept he introduces is that of capacity: the total amount of money that can be put to work with a given manager or strategy without negatively affecting performance. He corroborates my experience that some strategies (currency trading for example) have greater capacity than others (distressed investing in my example), and consequently that investors, all things equal, should prefer deep capacity rather than niche strategies.

The problem then becomes, can hedge funds deliver outsized risk-adjusted returns in markets that are highly liquid and efficient? His answer is that they can, to the extent that they offer superior investment skills. And since above-average skills are, by definition, in limited supply, as money (i.e. demand for skills) pours into the hedge fund industry, it begins funding managers whose skills “are not superior to those that are needed for index investing”. Here, academia poetically meets practitioners. Mr. Cohen succinctly remarked in the same panel that “talent is very thin” and eloquently added that he was “blown away by the lack of talent.”

And so, comes the point at which hedge funds are too large to beat the market: they are the market. Professor Avellaneda uses a linear regression to study the marginal return of a dollar invested at any given hedge fund size. As expected, the line is well-fitted and downward sloping, meaning that returns diminish as assets increase. He insightfully extrapolates that the hedge fund industry will no longer outperform the S&P 500 past $2 trillion in size.

The industry first reached $2.3 trillion in 2008 (dipping for two years after the Global Financial Crisis before ramping back up to today’s $3 trillion): precisely the year that started the streak of a ten out of eleven-year underperformance. Naturally, one can wish to invest in hedge funds for diversification. But it will take innovations and changes for a trend reversal in outperformance. Follow me on LinkedIn. Check out my website.

Dominique Mielle

 Dominique Mielle

I spent twenty years as a partner and senior portfolio manager at Canyon Capital, a $25 billion hedge fund. In 2017, I was named one of the “Top 50 Women in Hedge Funds” by Ernst & Young. 

One of the only senior women in the hedge fund business, I played key roles in complicated bankruptcies, serving as a leading creditors’ committee member for Puerto Rico, and as a restructuring committee member for U.S. airlines in the wake of the September 11 attacks. 

I was a director and the audit committee chair for PG&E during its fifteen-month bankruptcy process and emergence, and now sit on the board of Digicel, Anworth (ANH), Studio City (MSC) and Tiptree (TPTR). 

Since retiring in 2018, I have been working on a book about being a female investor in the golden age of hedge funds. For more information visit http://www.dominiquemielle.com

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Warren Buffett made a $1 million bet in 2007: that hedge funds would not outperform index funds over the next 10 years. WSJ’s Nicole Friedman checks the numbers and handicaps Buffett’s chances of winning the bet on Lunch Break with Tanya Rivero. Photo: Bloomberg Subscribe to the WSJ channel here: http://bit.ly/14Q81Xy More from the Wall Street Journal: Visit WSJ.com: http://www.wsj.com Follow WSJ on Facebook: http://www.facebook.com/wsjvideo Follow WSJ on Google+: https://plus.google.com/+wsj/posts Follow WSJ on Twitter: https://twitter.com/WSJvideo Follow WSJ on Instagram: http://instagram.com/wsj Follow WSJ on Pinterest: http://www.pinterest.com/wsj/ Don’t miss a WSJ video, subscribe here: http://bit.ly/14Q81Xy More from the Wall Street Journal: Visit WSJ.com: http://www.wsj.com Visit the WSJ Video Center: https://wsj.com/video On Facebook: https://www.facebook.com/pg/wsj/videos/ On Twitter: https://twitter.com/WSJ On Snapchat: https://on.wsj.com/2ratjSM

The Funds With The Smartest Investors, And The Funds With The Dumbest

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Are mutual fund investors impulsive? Do they jump into a fund after a winning streak and then sell out, in despair, after a bad stretch?

I tested this hypothesis by going to Morningstar MORN , the securities analysis outfit in Chicago. The Morningstar Direct database, the version of its service sold to investment pros, has performance details that shed light on timing decisions by fund buyers.

The answer to the question: Yes, fund clients are impulsive. Bad timing causes them to earn considerably less than they would have earned by buying and holding. On funds of domestic stocks, they’re throwing away something like $54 billion a year.

The key to this analysis is a number that Morningstar calls “investor return.” It measures the average results taken home, as opposed to the performance of the fund.

The usual performance number reported for a fund assumes a hypothetical buyer putting a single sum of money in at the beginning and leaving it untouched until the end of some measurement period, like a decade. Example: The Schwab 1000 Index fund delivered a 233% cumulative performance over the ten years to May 31. That amounts to a compound annual 12.8%.

The investor return on this index fund is a bit less, at 12.6%. This figure takes into account the monthly flows of money into and out of the fund. More precisely: If fund shareholders had been earning a constant 12.6% on every dollar they kept in play, they would have wound up with the fund’s ending assets. In short, the 12.6% measures average investor experience.

Where does the 0.2% shortfall come from? It means that buyers of this fund had a slight tendency to add money, or to take it off the table, at the wrong times. We’re human. After a bullish run we’re in love with stocks and buy more—maybe near a top. A correction in stocks makes bonds more appealing and we hold back, just when stocks are a bargain.

The mistakes among Schwab’s clientele pale in comparison to those of fund buyers generally. Morningstar has 827 domestic-stock funds with both ten years of history and sufficient detail on asset balances to permit a calculation of investor return. At 527 of those funds, not quite two-thirds of them, timing decisions lowered the annualized gains experienced.

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Among all 827 funds the average impact, with both positive and negative impacts included, was a loss of 0.64% a year. Keep that up for 30 years and you shortchange a $1 million retirement portfolio by $175,000.

It is important to understand what Morningstar is measuring. A shortfall does not occur when a customer is invested for only a portion of the ten-year period, since both the reported performance figure and the investor return are compound annual percentages. (Morningstar’s investor number is an internal rate of return. For an explanation of how that arithmetic works, see this article on how to compare your results to a yardstick.)

A shortfall will show up, though, if people jump into a style or sector after an upswing, only to be disappointed and then move into another kind of fund that seems to be the new ticket to wealth. Such performance chasing depresses investor returns at both funds.

Some funds have customers who are either lucky or smart. Their timing is good. They do better than the performance figures indicate.

These ten funds all beat the market, as measured by the Schwab index fund, and had customers who improved on those good results by being invested at the right times:

Noteworthy on this list are two funds from the Kayne Anderson Rudnick subsidiary of Virtus Investment Partners VRTS . KAR leans toward concentrated, quirky portfolios of stocks like Teladoc Health and Morningstar. (Forbes profile here.)

Winning funds with well-timed investor moves are the exception. More common: funds where investor flailing depresses gains. These ten underperformed the market and had customers who magnified the damage with their stumbling:

I asked the operators of the second group of funds for comments and got one, from Needham:

“Our mission is to create wealth for long-term investors. Those who trade mutual funds or try to time the market may see returns that are less than those who stay invested and have been rewarded with excellent long-term returns.”

Moral of this story on investor returns: Follow Needham’s advice. Invest with enough conviction that you can stay put.

And if your attention is fleeting? Maybe you should discontinue the search for market beaters and just own an index fund.

Here’s one more statistic from that Morningstar data set. The average investor experience in the 827 funds was a compound annual 10.5%. That’s 2.3 points less than the return on the Schwab 1000 fund. This shortfall comes from both bad timing by customers and a parallel flailing by the funds. In their struggle to beat the market the fund managers ran up trading costs as well as their own management expenses.

Yes, 2.3% is a gigantic loss. Keep it up for 30 years and you cut your $1 million retirement in half.

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William Baldwin

William Baldwin

I aim to help you save on taxes and money management costs. I graduated from Harvard in 1973, have been a journalist for 45 years, and was editor of Forbes magazine from 1999 to 2010. Tax law is a frequent subject in my articles. I have been an Enrolled Agent since 1979. Email me at williambaldwinfinance — at — gmail — dot — com.

Source: https://www.forbes.com

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3 Ways to Recession-Proof Your Company & Why Right Now Is the Best Time to Do It

David Barrett survived the Great Recession by making his business as boring as possible.In 2007, the founder and CEO of Expensify was trying to launch a prepaid debit card that would enable–and hopefully encourage–charitable giving to panhandlers in San Francisco. But, as forecasts of economic turmoil mounted, investors were interested only in ideas that sounded “sane and reasonable,” he says. So Barrett started pitching the safest related product he could imagine: an automated expense-report management system.

That worked; Barrett secured enough money to quit his full-time job in April 2008. He still intended to pursue the card idea, but soon hit a production snag–and with the economy in free fall, Barrett recalls thinking, “Shit, I really need to make a business out of this right now.” So he doubled down on business-expense management.

Almost 1.4 million small businesses with employees closed from 2008 through 2010, according to the U.S. Small Business Administration. Expensify, now with five offices and a staff of 120, wasn’t one of them–a feat Barrett attributes to those pre-recession pivots. They taught him to “build a product that is needed in a downturn,” he says. “Sell aspirin, not vitamins.”

Recession war stories may seem out of place during this prolonged period of economic growth, but there are signs that a slowdown is on the way. A June 2019 survey from the National Association for Business Economics put the risks of a recession beginning before the end of 2020 at 60 percent. A third of the 2019 Inc. 5000 CEOs expect a recession to begin this or next year, with another third bracing for one in 2021. Whenever the downturn hits, these steps can help your business weather it.

Fundraise.

Build your cash reserves while you can. Serial entrepreneur Mitch Grasso had a potential downturn in the back of his mind while raising capital for his latest venture, Beautiful.ai. The presentation software company raised $11 million in Series B funding in March 2018, just 17 months after a $5.25 million Series A round. “I chose to raise money earlier than I would have otherwise, even though it cost me probably a little more” in terms of valuation, says Grasso. “If there’s money on the table, take it sooner rather than later. You’ll always find a way to spend it.”

Conduct consumer research.

You might not be able to pivot your entire business model, so figure out what products and services your customers will need even in poor conditions, says Carlos Castelán, managing director of the Navio Group, a retail business consulting firm.

Ryan Iwamoto, co-founder of caregiving service 24 Hour Home Care, started asking his customers for their input when the federal government introduced sweeping rules for home health care agencies in 2016. He wanted to be “the first in market to educate them on all the regulations coming down in our industry,” Iwamoto says. “It allowed us to build better relationships”–and has helped boost his company’s revenue by more than 68 percent since the law changed, he reports.

Ink multiyear contracts with clients, not vendors.

Earlier this year, during a regular assessment of her company’s revenue targets, Sandi Lin considered the potential impact of an economic slowdown. The co-founder and CEO of Skilljar was happy to discover half of the customer training platform’s revenue was on multiyear contracts, meaning “at least theoretically, that even if all of our other customers went bankrupt,” Skilljar would have some runway–and less pressure to scramble for new business.

Lin applies the opposite approach for vendor contracts; while Skilljar is sponsoring a major customer conference this fall, she negotiated a minimal commitment on room nights and seats with the hotel and venue. Which is a smart business practice in good times, too; as Lin says, “the most important job of an entrepreneur is to survive.”

By: Jeanine Skowronski

Source: 3 Ways to Recession-Proof Your Company–and Why Right Now Is the Best Time to Do It

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