“What’s Happening Now Is Epic” – Un-hedged & Un-hinged Fund Managers Manic Amid Corona-Crisis
It’s been a tough year for hedge funds so far. In fact, truth be told, it’s been a tough few years as the incessant flood of free money into markets has made ‘masters of the universe’ of the dumbest investors and dummies of the smartest investors as ‘rational’ investing has been thrown out the window in favor of BTFD strategies, leveraged longs, and ‘worst is first’ malarkey.
The average equity hedge fund is down 10.4% in March, according to Hedge Fund Research. That is the worst monthly performance on record.
This latest collapse comes at a particularly ugly time, as The FT notes, hedge funds have already suffered investor outflows for 13 of the past 17 quarters – with buoyant markets helping to keep the industry’s assets under management steady at about $3tn – and the number of firms has shrunk for five consecutive years.
Some managers are seeing opportunity to prove themselves – note, ‘hedge’ funds are ONLY down 10.5% in March while the market is down 15% – but many others remain more shell-shocked…
“What is happening now is epic,” said Mark Connors, a former hedge fund manager who now works on Credit Suisse’s prime brokerage desk.
“The industry will not be the same after this,” he added, predicting that many funds will fall by the wayside, while the big become bigger.
Performance across different hedge fund strategies, between individual managers, and even within multi-strategy funds has varied extremely widely in the last few months, but most strategies have suffered at least one stretch of stomach-churning losses – perhaps most notably “Risk-Parity” or “Vol-Targeting” strategies that had become so popular in a world of central bank repression, which suffered their worst month since Lehman.
“It feels like strapping on a flak jacket and jumping on hand grenades going off every day,” said the head of one US hedge fund.
“And it feels like I’ve lost some body parts.”
Desperate policy-makers and politicians, unable to accept responsibility for blowing the bubble ever higher before its burst, have resorted to the usual playbook of blaming these “billionaire speculators” and “short sellers” and also the algos (the same algos that ramped stocks day after day for a decade after momentum was ignited by some regurgitated headline), but:
“You can’t blame short sellers just because some industries [or] companies are doing very badly these days,” said Lionel Melka, fund manager at HOMA Capital.
“Throwing the thermometer in the bin does not decrease your fever.”
Given the turbulent markets, The FT concludes rather ominously, that many investors will be evaluating their hedge fund allocations, and the result is likely to be more outflows. Simon Lack, a former hedge fund allocator at JPMorgan turned critic of the industry, said:
“If they just lose a bit less than stocks, then I think a lot of investors will ask, what is the point?”
What’s the point indeed?