Bloomberg has apparently just taken it upon itself to pronounce the early, unceremonious demise of the traditional Long/Short Hedge Fund model after seemingly declaring that stocks will continue to march higher in perpetuity, with minimal volatility, thus rendering traditional financial analysis and stock picking about as obsolete as a Motorola pager from 1982. Of course, we embellish a little…but not much…here is Bloomberg‘s take:
The long and short on hedge funds is that long and short isn’t working so well anymore.
That’s the rather simple strategy that built the $3.2 trillion industry — the once-durable buying long when you figure an equity will go up and selling short when you reckon the opposite — and that basically put the “hedge” in hedge fund. These days it’s unreliable, at best.
There are any number of reasons trotted out for long-short’s fallibility: little volatility, low interest rates, so much passive investing in stocks by the likes of Vanguard Group and BlackRock Inc., too many quantitative funds in the business. What’s more, the number of publicly traded companies in the U.S. is, at about 3,700, half what it was in 1996.
“The one strategy that is facing an existential question is long-short equity,” Ted Seides, former head of hedge fund investor Protégé Partners, said recently at an investor conference at the University of Virginia’s Darden School of Business in Charlottesville.
As evidence for their controversial call, Bloomberg cites the billions of dollars in capital that have been thrown at long-only, passively managed funds since the stock market started its meteoric rise off the lows back in 2009. Of course, if self-fulfilling prophecies such as these are actually meaningful then perhaps Bloomberg should just recommend that everyone pile into Bitcoin because its asset base has grown way faster than that of ETFs and/or other passively managed products.
So, where does Bloomberg figure you should put your money these days? How about a nice quant fund? Better yet, how about an investment advisor that will effectively take your money, buy the SPY and then charge you 1% of assets for his “advice”…a strategy you could easily execute yourself on E-Trade for about $7.95 in trading fees.
The biggest inflows this year have gone to long-biased or long-only products run by the quantitative funds, which use computers to decide what to buy and charge lower fees than most.
Renaissance Technologies, for instance, has pulled in $10 billion so far this year, while assets at Two Sigma have risen to $50 billion, up from $38 billion a year ago.
At Luxon Financial, investors have asked for products that can wager on rising and falling prices of securities but that charge much lower fees than hedge funds, said President Anson Beard, whose last job was an executive at a stock hedge fund that closed. Luxon’s Cary Street Partners is a $2.5 billion firm of about 40 registered investment advisers whose clients are high-net-worth individuals in the Southeast U.S. and Texas.
Beard said he sees these so-called liquid alternatives taking the place of hedge funds in many investors’ portfolios.
Of course, as famed hedge fund investor Lee Ainslie points out, sacrificing upside potential to fund hedging costs during a massive equity bubble is almost always blasted as a useless waste of capital by those chasing that bubble…
Or consider Lee Ainslie, who started Maverick Capital in 1993 after he left Tiger Management, where he trained with famed investor Julian Robertson. He lost about 10 percent last year and is down again this year.
Traditional stock hedge-fund managers remain hopeful. Ainslie told investors that he expects short selling to again be a profitable pursuit.
“On the short side, periods of frustration are not uncommon and are typically followed by periods in which short selling is actually quite rewarding,” Ainslie wrote in a letter this summer.
…which is true right up until the point that it isn’t…
What is that saying about “he who laughs last?”