Investor's Notebook: Have hedge fund managers lost their lustre?
By the end of the year all SA hedge funds will be registered as collective investment schemes. Some, known as qualified investor schemes, will continue to focus on the institutional market and the very rich, and the retail funds certainly won’t be taking R200/month debit orders as their minimums will be for R50,000 lump sums.
But some mass-affluent investors will be able to add hedge funds to their asset mix in a much more straightforward way than before. The funds promise a high probability of positive returns, which will be more difficult to achieve than they were during the bull market of the past 20 years. But it is coming at a time when hedge fund managers globally have lost their lustre. A recent Reuters article said that hedge funds are facing a storm of unsatisfied clients either demanding steep discounts on fees (hedge funds typically charge 2% fixed plus 20% of the upside) or withdrawing their funds. And they include giant institutions such as the New York City Employees Retirement Fund and the California State Teachers Retirement System. David Einhorn, who runs Greenlight Capital, returned a negative 20% in 2015, and the fund size has shrunk from $12bn to $9bn in eight months. And this was the fund that made a bundle by shorting Lehman Brothers just before it collapsed during the financial crisis.
A glance through the latest eVestment industry performance report indicates that Greenlight (which is not related to Old Mutual Greenlight, at least I hope not) is by no means an isolated example. Over the past 12 months only market-neutral equity and origination & financing strategies had positive returns, and even these strategies eked out less than 2%. The worst strategy in a self-fulfilling prophecy was the optimistically named distressed strategy, which was down 8%.
There were some big swinging stars who had a terrible 2015, with losses above 10%, such as Larry Robbins, the founder of Glenview Capital Management, and William Ackman, founder of Pershing Square. If an adviser tries to persuade you that emerging markets are different, as there are more inefficiencies to exploit, be sceptical.
Over the past 12 months the only emerging market hedge funds to make money in dollars were those exposed to Russia, though clients won’t be jumping for joy, as these funds gave just 0.39%. The Africa/Middle East region was the worst, with a negative 15.8%.
The Reuters report argues that hedge funds are victims of their own popularity — there are more than 10,000 funds. And many managers chase the same ideas, which drives spreads downwards, reducing potential returns. Low interest rates make the returns from many arbitrage strategies barely worth the effort.
There is pressure on US managers to reduce their fees, which can only spill over, even into the more stable and conservatively managed SA industry. Globally, investors pulled $15.1bn out of hedge funds, just in the first three months of this year. Yet there remains a market for hedge funds in a world of overpriced equities and bonds with tiny coupons. US public pension funds, which need to find real returns where they can, have increased their allocation from 9% to 9.2%.
But the returns will often be underwhelming. Even guru manager Steve Cohen, whose reputation is still intact, recently said he was blown away by the lack of talent in the industry. Can we say the same for the SA industry? There has already been some weeding out; not all managers have been able to survive on the small industry asset base. But I hesitate to underestimate certain managers. I’d give money to Dave Fraser and Clive Nates at Peregrine, for example.