With indexes up across the board this summer, you might assume that hedge fund managers are having a stellar time. Except they're not.
The Hennessee Global Hedge Fund Index rose 3.37 percent in July, posting less than half the performance gains of the S&P 500, which jumped 7.52 percent in the same month. Even the index's best group, convertible arbitrage, failed to match the S&P's result, with an average of 6.21 percent in profits in July.
Meanwhile Atticus Capital, once a $20 billion goliath that swung its weight wherever it pleased in the corporate boardrooms of the companies it invested in, announced it is shuttering its $3 billion flagship fund, Atticus Global.
Timothy Barakett, the fund's founder and lead manager, adopted an uncharacteristically (albeit distantly) personal tone in his letter of explanation for closing Atticus Global: "After fifteen years of being singularly focused on building and managing Atticus, I believe it is time to reassess my future," he wrote.
It's tough being a hedge fund manager. You not only have to post gains, but mostly you have to post market-beating gains. And that means that by far the majority of the time, you have to get market direction spot-on.
The rumor going around the street right now for the reason why hedge funds have failed to make any substantial income over the last month is that managers have been placing huge technical "short" bets, anticipating declines. Indeed, one East Coast money manager told me in the last week of July that he was 20 percent short, and adding to that position.
The problem is, the stock market failed to fall. Instead of realizing they had got it wrong however, money managers merely doubled-down on their short positions with renewed conviction that an even larger selloff was due. Instead, the S&P 500 Index shot through the 1000-mark, and most hedge fund managers were left holding the bag -- or at least, a little of it.
That is why long-only hedge funds beat most of their rival funds to the punch in July -- although even they only managed to eek out an average of 4.75 percent, mostly because they hoarded an unnecessary amount of cash. Not however, if you were at Goldman Sachs with sophisticated computer models.
A Hiring Trend Reversal?
It used to be the case that wet-behind-the-ears investment bankers dreamed of bolting out the door of their bulge-bracket employers as soon as possible in order to go-it-alone in money management. With banks' bonus payments at record levels this year, however, and market sentiment still so uncertain, there may be a small reversal of that trend.
The evidence certainly seems to point to more hedge funds getting under the umbrella of big financial brand names. Morgan Stanley has been looking to spin off its proprietary trading desk into a stand-alone hedge fund-style entity recently. Indeed, big trading revenue this year at all the banks has led to talks of more hedge fund entities within those structures.
The most stunning example of these bank-owned hedge funds is Nomura's Global Opportunities Group, which is raising up to $1 billion from investors over the next year. Presciently, the fund's manager Benjamin Fuchs said this week that "lots of people can make money in a bull market. The real test of this type of business is whether you can make money cross cycles: bull market, bear market, sideways market."
But who would have thought two years ago that the day would come when it may well be more profitable trading those cycles with a big bank behind you?