Toxic Mix in Fed’s Asset Bubble Nirvana: Hedge Funds on Track this Year for Second-Highest Redemptions in History!

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And what happened in 2009?

The toxic mix of crummy performance and high fees are having some impact. And it’s big money: The hedge fund industry has over $3 trillion under management. And some of this money is getting antsy.

In July, hedge funds experienced net outflows of an estimated $25.2 billion, the largest monthly net redemption since February 2009 ($28.2 billion), according to an eVestment report cited by Bloomberg. In June, hedge funds got hit with net outflows of $23.5 billion. In March, redemptions had hit $7 billion, and in January $20 billion. With some inflows in the remaining three months, total outflows for 2016 so far amount to $55.9 billion.

“Unless these pressures recede, 2016 will be the third year on record with net annual outflows,” according to eVestment’s report. The other two years were 2008 and 2009.

During the first seven month, when the S&P 500 rose 7.6%, hedge funds industry-wide had gains of only 1.2%, according to Bloomberg. The 10 funds with the largest redemptions lost on average 4.1%.

So how bad is this compared to 2008 and 2009?

In 2008, according to the Credit Suisse/Tremont’s annual summary (released in early 2009), an estimated 29%, or $582 billion, of the industry’s assets evaporated, the majority due to plunging prices of financial assets: the Hedge Fund Broad Index was down 19.1% in 2008, the first double digit loss in the history of the index going back to 1994.

But $149 billion disappeared due to investor redemptions. It was also the first year of net asset outflow in the history of the index. It brought total assets under management down to $1.5 trillion. At the time, the words “redemptions” and “suspensions” kept cropping up even on CNBC.

But not every hedge fund got clocked: 106 funds in the index made money, while 390 funds in the index lost money. The best-performing fund made 93%, while the worst performing fund lost 100%.

Among the categories, the index of Equity Market Neutral Funds was the biggest loser, down 40.3%. The index of Dedicated Short Funds was the biggest gainer, up 14.9%, its best fund producing a gain of 68% and its worst fund a loss of 49%. If you can’t make money with a dedicated short fund during a Financial Crisis, when can you?

The Hedge Index (emphasis added):

The majority of losses occurred in September and October as hedge funds registered two of the worst months of performance in the history of the Broad Index.

However, despite significant losses, hedge funds fared better than broad equity indices overall by limiting drawdowns and maintaining considerably less volatility.

The report pointed out that during the worst moments in 2008, the hedge fund Broad Index was down 19.5% while the MSCI World Index was down 44% and the Barclays Global Aggregate Bond Index was down 10%. Back then, the hedge fund industry could still beat the market!

In 2009, the Fed stepped in with bank bailout programs, corporate bailout programs, QE, zero-interest-rate policy, nearly free loans to the well-connected with which to buy assets in order to drive up asset prices…. The Broad Index booked gains of 18.6%. The Hedge Index annual summary in early 2010 gloated:

2009 marks the best annual hedge fund performance in a decade, as measured by the Credit Suisse/Tremont Hedge Fund Index, and the greatest performance rebound since inception of the Index in 1994.

It was the year when Wall Street bonuses hit an all-time record, even as the entire financial sector, along with the biggest corporations, was getting bailed out by the Fed (and to a much smaller extent by the taxpayer via TARP).

By the fourth quarter of 2009, word got around, and investors started pouring money back into hedge funds. But for the year, net redemptions still amounted to $74 billion.

If 2016 redemptions – currently at $55.9 billion – get worse, they might well pass the $74 billion of redemptions in 2009. And then 2016 would go down as the second worst year for hedge funds in history.

With $3 trillion in assets under management, a whole generation of hedge fund traders has seen nothing but a bull market that has been engineered by the Fed to create enormous asset-price bubbles for the benefit of those holding the most assets.

Since March 2009, there has been one rule to make money: buy everything. Many hedge funds just chase stocks higher and then get caught with their pants down when things turn sour. Over the last two years, many of the formerly easy and obvious bets imploded, including energy. And just chasing after darling stocks, blindly following each other with huge bets into Valeant or even Apple, has caused some big losses despite record high overall market valuations.

Clients, including big pension funds, facing a toxic mix of crummy hedge-fund performance in asset-bubble nirvana and fees often amounting to 2% of assets and 20% of profits, are having second thoughts.

Unperturbed by reality, stocks have continued to march higher, causing the head of credit strategy at Citigroup to lament so eloquently, “Everything feels distorted and unnatural.” Read…  “Mother of all Shorts” when Stocks Cave to Reality?

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  10 comments for “Toxic Mix in Fed’s Asset Bubble Nirvana: Hedge Funds on Track this Year for Second-Highest Redemptions in History!

  1. OutLookingIn
    August 25, 2016 at 11:02 am

    Plus, not to mention those funds that have left the arena completely, for lack of a foundation upon which to invest, with some modicum of reduced risk and expected returns.
    Of which there are many over these past few years.
    Returning investors capital and liquidating their positions. Closing shop.
    I know a few of these funds that closed were around for a long time.
    Would interesting to see a list of such funds for the past 5 years. When they close up shop scattered over a number of years, people hardly take notice.
    Follow the smart money.

  2. Meme Imfurst
    August 25, 2016 at 11:38 am

    The smart money knows how to count chairs, has heard the music before and knows on which beat it ends.

    Only rampant greed keeps this stage show open for business. When you hear a waiter discussing with and other waiter some ‘investment idea’ that was heard on CNBC, you know there is a fund that will welcome them with open arms as their check bounces to the landlord.

    Chasing so called investment ideas means you are not doing your homework or like so many voters, no matter what you find out you are still in there for the “long haul”.

    I know a few who want out but keep putting it off another day. These are the people the smart money and fund managers just adore.

  3. Double D
    August 25, 2016 at 11:54 am

    Yet with all of this dire news, where is the stock market today? It just doesn’t matter how many hedge funds or trillions of dollars leave the market. Global CB’s have it backstopped. As long as those with the real big money believe that CB’s will “always” be there to provide the necessary liquidity, to them
    who cares what hedge and pension funds are doing.

    We are in truly unprecedented times where nothing is real. It’s an Illusion, the greatest magic trick of all time and the greatest thievery of all time.

    • VegasBob
      August 25, 2016 at 12:07 pm

      My view is that rampant central bank money printing has turned money into a fundamentally dishonest representation of value. How can one have confidence in the value of a currency when central banks can electronically print up the money by the trillion$?

      It should be obvious to all that when a society’s money is dishonest, all other aspects of that society ultimately become dishonest.

      • OutLookingIn
        August 25, 2016 at 12:22 pm

        Agree. Corruption run rampant.

        Case in point:
        Today is silver September option expiry.
        The spot price must be smashed lower. Yesterday morning in New York at 0840 AM ET “someone” dumped $1.5 billion or 10,000 contracts of notional gold onto the market in one minute! Smashing the spot price lower and along with it the spot price of silver.

        Smoke and mirrors.
        The New York comex gold/silver futures market is the smoke and the London LBMA spot fix is the mirror. Reflecting the so-called “price discovery” of the comex which should be called the crime-ex!

  4. Ehawk
    August 25, 2016 at 1:23 pm

    Who cares… Economy is “booming”… seriously construction is everywhere non-stop… commercial buildings and state and city roads construction everywhere. Lots of Jobs in construction people making lots of money…

    Some hedge funds not performing? The more people talk about crash and lagging jobs.. the more tech jobs, more construction jobs, and the more new cars on the roads we see. I am speaking of the Bay area and 60 miles radius…

    • Chicken
      August 25, 2016 at 3:23 pm

      Pretty much the same around the capital beltway area, military subcontractors obviously raking it in.

  5. Chicken
    August 25, 2016 at 1:51 pm

    Based on my observations, 1/2 of what we read is incorrect, the other 1/2 is misleading.

    • polecat
      August 25, 2016 at 3:36 pm

      I’ll take ‘what’s a glass most empty’ for -$100.00 Alex !

Comments are closed.