Six months before Jekyll & Hyde: The Musical is
revived on Broadway, the hedge fund industry is turning in its
own two-faced performance.
As the recent
Absolute Return quarter-end performance wrap
pointed out, this year can fairly be called a bounce-back for
the industry. Managers are profiting who only twelve months ago
helped the industry produce its second losing year in 14.
Some 79% of funds in the Americas were positive in the third
quarter, a better showing than that of funds in Europe and
Asia. Even some surprising early year laggards like
Bridgewater Associates and
FX Concepts have managed to pull themselves into the black.
A full 54% of funds in the
HedgeFund Intelligence database are above their high-water
If this sounds like good news to you, you wouldn't know it
from reading in the Wall Street Journal, which
recently lamented that "Hedge Funds Belt Few Home Runs."
With the solemnity of an advertisement for the Marines, the
paper observed, "They are the few. The proud. The hedge fund
managers making a killing this year."
Then the Journal added this shot across the bow of
the S.S. Greenwich Avenue: "Those hedgies who have managed to
beat the market are driven by a few distinctive--if sometimes
buying up mortgage bonds, pocketing the yield and marking
the appreciation in the bond as a monthly gain for the fund has
been trademarked, somebody call Stephen Glass because theres a
lot of plagiarism going on in some of the industry's biggest
Sure, the aforementioned mortgage trade is not without risk.
But investors should be expected to do a
private-high-school-level of research before handing money to
any well-suited midtown Manhattan marketer handing out glossy
Ovis Creative-produced pitchbooks.
Back to those double-digit gains and how tragically
rare they are. Yes, it is true that high-flying
strategies with double-digit returns are the exception and not
the rule, but that is by design. To survive in the post-2008
court of public opinion, the industry largely recast itself as
a drab champion of dependable yield in a long-term low-rate
environment. The average institutional investor far prefers a
steady diet of singles over swinging for the fences with the
chance of a strikeout, and is apparently willing to pay hedge
fund fees to get it.
Fifteen of the
Absolute Return Composites 16 strategies are positive this
year, and the majority will deliver returns to satisfy, if not
blow away, most pension and endowments roughly 7-8% annual
return targets. That's enough to get a call back for another
date, regardless of how the Standard & Poor's 500 has
Mocking the majority of the industry's best returns as due
only to exotic new bets belies the fact that hedge funds are a
diverse lot of geniuses and goats, and that many of the biggest
names have actually been reducing their swings over the long
term. With some exceptions (hey there, Chase Coleman!), hedge
funds long ago ceased being sexy. Those who would lament the
lack of outsized gains are putting on rose colored glasses for
a hedge fund era that hasn't existed for many years. As Simon
Lack has ably explained, in the days when the hedge fund
industry produced those fantastic fairy tale returns, you could
fit all of the managers into a NYC subway car, and no one would
need to stand, either.
In 2007, which has been selectively memorialized as the last
year of fun before the keg dripped dry at the hedge fund house
party, many big name managers actually did just OK.
The Millennium International Fund rose an unsensational
The Canyon Value Realization Fund gained a modest 6.91%.
The Marathon Special Opportunities Fund returned 7.25%.
That is again the truth this year for many prominent
managers, and it should surprise few.
Bridgewater's Pure Alpha fund is up less than 1% this year
through the end of September. Millennium has gained less than
4%. Och-Ziff Capital Management's Master Fund has basically
tracked the Absolute Return benchmark. But none of these firms
is going away anytime soon.
For better or worse, the face of the industry is neither
Jekyll nor Hyde. The industry has matured. It's in its 35th
year of marriage at 10pm in granny panties watching Nick at
Nite and reheating the early bird special to eat on a TV tray
in an adjustable bed. Put your teeth on the nightstand. The
sexy times ended a long time ago.
Absolute Return staff writer Rob Copeland can be
reached at firstname.lastname@example.org