In the midst of what to some observers looks like a shrinking of the hedge fund industry, Renaissance Technologies, LLC, seems to be an exception.
Renaissance uses closely held computer models and alogorithms to pick its bets. After a period of inconclusive results, the fund seems to have finally found its legs. For over a year already the firm has posted better than the market gains.
Their good results is attracting new money, to the tune of $7 billion this past year, mostly from wealthy clients of UBS Group AG, Citigroup Inc, and others. The fund now manages over $36 billion, up from $27 billion last year. That includes a $1 billion return to investors from its signature Medallion fund, which is now not taking new investors.
The success of Renaissance is one more bit of evidence that quantitative funds can, and do, beat traditional investing methodologies.
The Sohn Investment Conference’s San Francisco branch held its seventh annual meeting this week. The conference is co-sponsored with CNBC, and is not only the first cousin of the prestigious Sohn New York gathering, but also raises funds to fight pediatric cancer.
The conference opened with the “Next Wave” panel discussion in which rising stars in the hedge fund industry who have recently begun new ventures discuss their latest picks. Included as recommended bets were a languishing jewelry chain and a biotech company.
Chamath Palihapitiya, founder and CEO of Social Capital, said that he was supporting an enterprise cloud software company known as Workday. He predicted that the $18 billion company will be worth $100 billion in ten years.
Carson Block, a short seller, said he is placing a bet against a “quite aggressive” small cap construction contractor. The company, Tutor Perini, based in Los Angeles, is headed by ex-Miramax studio investor Ronald Tutor. The market value of the company’s stock is worth $1 billion now, up more than 30 percent this year.
“From our perspective nothing has fundamentally changed from this company since it was bouncing around at $15 a share,” said Block. Tutor Perini’s stock has been selling for $22.20 a share.
At a time when many hedge fund firms are closing shop, it is noteworthy when a new one enters the marketplace. It is even more eye-catching when the founder is a mere 28 years old. Harvard Business graduate Jamie Sterne launched Skye Global Management with $75 million back in July, after doing a two-year stint at Dan Loeb’s Third Point as an equity analyst.
Sterne was previously employed by Greenmantle as a macroeconomic analyst, and at BeaconLight Capital as a long-short equity analyst.
In addition to his MBA, Sterne also has a degree in history from Harvard which he earned in 2010. His first job was at Maverick Capital of Lee Ainslie.
Most hedge funds are launched by managers with much more experience who are at least in their late 30s or early 40s. One other exception however is David Einhorn, who started his Greenlight Capital when he was only 27.
Funds based in Singapore are showing better results than their Asian-based counterparts, according to data collected by Eurekahedge Pte. The reason is that Singapore puts more focus on India and global markets, while Hong Kong and Japanese based funds lean more towards Chinese and/or Japanese securities.
During the first seven months of 2016 funds headquartered in Singapore rose by 2 percent. Hong Kong based funds shrunk by an average of 2.3 percent. Australia-headquartered funds also rose, by 1.9 percent, but those based in Japan declined by 2.5 percent.
Comparing the indices of India with those of China also show the reason for the discrepancy. India’s S&P BSE Sensex Index grew by 9.4 percent so far this year, while China’s CSI 300 Index lost 13 percent, and Japan’s Topix declined by 15 percent.
“Singapore has the most diversified hedge fund industry in Asia with regard to managers’ strategic and regional mandates,” said Mohammad Hassan, head of hedge fund research at Eurekahedge. “Diversification has helped the domestic industry post the best overall gains in Asia, while China and Japan equity-focused centers such as Hong Kong and Japan are in the red.”
Chanos explained his position at the CNBC Institutional Investor Delivering Alpha conference held on Tuesday. Placing his short bet on Tesla, the Kynikos Associates hedge fund manager, reiterated his opinion expressed in June that Musk’s plan to acquire SolarCity is a “shameful example of corporate governance at its worst.”
Only now Chanos is even more convinced of Tesla’s inescapable fall since Musk released new information about his planned purchase. That information helped him realize “just how crazy this merger is and the damage it’s going to do to shareholders.”
Chanos’ basic argument is that both Tesla and SolarCity are in desperate need of capital. Both companies are dealing with a serious cash shortage, and both have announced that they are looking to raise additional funds this coming year. Together the companies are spending about $1 billion every quarter, and will therefore need constant access to capital markets.
“And when you need that amount of money just to run your business model, you put yourself at risk,” Chanos proclaimed.
As investors pull their money after experiencing heavy losses, Sumitomo Mitsui Trust Holdings Inc. has decided to throw in the towel and liquidate its Japan-focused hedge fund. Add this fund to the many others who have closed shop and we see the largest exit of investment from the industry since 2009.
The firm decided to shut down its Sumi Turst Japan L-S I Alpha when only $10 million in managed assets remained in the kitty. The fund was started in 2007 and reached its highest value in 2012 with $100 million in assets. The last two years hurt the fund with annual losses.
This latest shut-down is in keeping with the general trend of investors getting out as these investments perform poorly in volatile markets. Worldwide the industry lost $25.2 billion just in July, the largest defection since February 2009. Asian hedge funds are in the same boat, with investors withdrawing a net $7 billion since the beginning of 2016 up until July. Regional assets invested in hedge funds come to about $55.3 billion.
Hedge funds invested in Japan lost on average 3.6 percent from January until August, comparing unfavorably with the 1 percent gain by funds invested elsewhere in Asia.
With such poor results it is not surprising that many firms have closed down funds. In a letter to investors JPMorgan Chase & Co wrote that it is closing down the JPMorgan Funds-Japan Market Neutral Fund. The fund, which launched in June 2011, decided to return investor money when assets shrunk to about $17 million on August 4. That low number was reached after “significant redemptions” wreaked havoc on the fund.
Hedge funds do not seem to be supporting Trump in anything like the ways it was predicted it would. Filings made with the Federal Election Commission for donations made in July show that the Donald Trump campaign raised a little bit over $2 million from hedge fund industry members, and most of that coming from just one source: co-head of Renaissance Technologies Robert Mercer.
Executive director of the Center for Responsive Politics, Sheila Krumholz, said that although the totals for July appear anemic, the trend for Trump is still positive.
“We can see that it has gone from a pittance — a mere thousands of dollars — to millions, but it’s impossible for us to say at this point what the final figure is for July,” said Krumholz. “It’s possible we’ll see, if not a sea change, then a big leap forward for Trump.”
The sums are especially disappointing in light of Anthony Scaramucci’s claim that about 20 percent of the approximately $70 million the Trump campaign raised in July was from hedge funds. According to Sacaramucci’s equation that would mean hedge funds had contributed a juicy $14 million, which seems to be not even close.
Paul Tudor Jones, manager of Tudor Investment, fired about 60 of his employees, or 15 percent of his workers. Poor returns and investor redemptions are said to have been behind the move.
Tudor manages about $11 billion for high net-worth investors, sovereign wealth funds, and pension funds. It is also one of the oldest hedge fund firms still in business.
The company’s flagship fund, Tudor BVI Global makes bets on international trends such as currencies and interest rates, has grown by 18 percent on average per year since its inception in 1986. This year is not one of its better years, however, with a down turn of about 2.5 percent as of late July.
The company’s other funds are all losing money this year, after making a profit last year, a year when the average hedge fund was in the red.
Several global macro funds are also losing money this year, and the average hedge fund this year has grown by a meager 3 percent. Layoffs are becoming a common site in the hedge fund industry as investors are demanding fee cuts and even their money back as they see poor returns on their investments. This summer Pershing Square Capital Management, another hedge fund giant, laid off about 10 percent of its workforce.
A report published by Barclays Bank shows that the number of hedge funds is shrinking for the first time since the 2008 economic crisis.
Poor earnings are forcing the funds to close, and bad returns are discouraging managers from taking the risk of opening new hedge funds.
The Barclays report predicted that by the end of this year there will be a net loss of 340 funds around the world, a 4 percent decrease from last year. In 2009 the industry also saw a 4 percent shrinkage on the heels of an 11 percent contraction during the height of the financial crisis in 2008.
Hedge Fund Research, a hedge fund research company, reported that today there are 10,007 hedge funds globally, as of July.
“Based on recent HF (hedge fund) performance and the increased challenges to launching an HF (hedge fund), we estimate that there would be a net decrease in the number of funds by YE (year end) 2016,” the Barclays report said.
Agile Fund Solutions, a money management firm based in California, announced that Greg Gleeson and Andrea Schweikert will be joining the company as hedge fund specialists.
Vincent Calcagno, CEO of Agile, explained the move to hire hedge fund specialists:
“Southern California presents a major opportunity for Agile. Greg is a veteran player in the SoCal market and has overseen hedge funds and family offices across all size scales.”
Concerning Schweikert, Calcagno added: “Coupled with Andi’s experience serving hedge funds, private equity and venture capital funds while at Rothstein Kass it gives Agile the ability to deliver on our mission of enabling managers to scale their business by having them focus on the portfolio while we focus on everything else.”
Gleeson had this to say about his new employment:
“I’m thrilled to be joining the Agile team. Agile’s “best-in-class” outsourcing model allows portfolio managers to utilize us for the aspects of their business we’re best at, allowing them to focus on making money for their investors, which is what they are best at. For many strategies and firms outsourcing is the future. This is evident from Agile’s rapid growth and I’m thankful that I have the ability to be a part of the evolution Agile is leading for our industry.”
“As Greg alluded to, the hedge fund managers I’m working with are really excited about Agile’s forward-thinking approach towards the traditional finance, operations and compliance functions,” Schweikart added. “I couldn’t be happier to be able to be a part of this dynamic team that operates in such a supportive family culture.”
Agile’s founder Nick Castoria added:
“To think that a year ago we had 11 team members and now we stand at 22 is both humbling and exhilarating all at the same time. I couldn’t be more excited about where Agile, our managers and the team are heading.”