When it comes to investing in hedge funds, the trending money says “small is the new big.” Over the past five years, at least, more money each year (except for the notable exceptions of 2009 and 2012) is flowing into hedge funds with AUMs under $5 billion. In 2014 the amount of new money invested in these alternative funds was virtually the same for large funds and small funds.
Of approximately $76.4 billion invested in hedge funds in 2014, close to half went to managers with under $5 billion under their watch. In 2013 the smaller funds received about 37 percent of money flowing into hedge funds, severely reversing 2012’s activity in which $93 billion was invested in the larger funds while $63 billion was withdrawn from small and mid-size managers.
One contributing factor to this trend is pension funds and endowments. These pools of money are beginning to point away from the larger funds run by financial-world celebrities since the smaller funds offer lower fees and better performance.
Chief investment officer for the University of California, Jagdeep Singh Bachher, who manages about $91 billion, said,
“I’d rather invest in funds that are small or midsize where managers are highly motivated and more aligned with us.”
No need to feel bad for the larger funds, yet. Giant managers like Och-Ziff Capital Management Group, LLC are still growing. When the economy bottoms out, like the crisis of 2009 and 2012, clients tend to take their money out of the smaller funds.
Not all measures of fund success conclude that smaller funds are better investments, either. According to HFR Inc, funds which manage over $5 billion have returned on average 9 percent since 2007. Smaller funds only returned about 6 percent.
In a different examination of the issue, however, 2,287 hedge funds that specialize in picking stocks, investment consultant firm Beachhead Capital Management saw that really small funds with assets between $50 million and $500 billion had returns which averaged 2.2 percentage points more over ten years than bigger funds.
“There have been a number of recent studies that have demonstrated consistent out-performance of smaller funds compared with large hedge funds,”
said Mark Anson, head of billionaire Robert Bass’s family investment firm. Mr. Anson has over half of the Bass hedge fund assets in companies with under $1 billion in AUM.
A protest union group called “Hedge Clippers” disrupted a well-attended hedge fund conference held in midtown Manhattan on Monday. The group was demanding from certain investors that they help them to create “fair wages” for workers in restaurant chains such as McDonald’s and Darden Restaurants.
The protestors shouted slogans such as, “Bill Ackman, show me $15,” referring to the wage they would like to see for workers, and the billionaire who runs Pershing Square Capital.
They also chanted, “Hedge fun billionaires, pay your fair share,” meaning that the fund managers should pay the 15 percent capital gains tax levied on long-term investments.
The shouting interrupted a session of the 2015 Active-Passive Investor Summit which featured Joele Frank, the head of a crisis public relations firm that defends companies from activist investors. The summit itself was hosted by the research firm 13D Monitor. The 20 minute protest was cut short when the group dispersed in response to threats of police intervention.
Charles Kahn, spokesman for the group, said that theyare targeting Ackman, Jeff Smith of Starboard Group and Nelson Peltz of the Trian hedge fund due to their current and past investments in Darden, Burger King, Wendy’s and McDonald’s.
“So many people are making money, literally, on the misery of workers,” Khan told USA TODAY.
Hedge Fund Research, a firm that tracks the ups and downs of the hedge fund industry, reported that hedge funds rose by 2.4 percent on average during the first quarter of 2015. That figure surpasses the stagnant S&P 500 which rose by 0.4 percent during the same period.
This news comes as a positive reflection on the hedge fund industry after a long stretch of bad news and slow to no growth. The HFRI Fund Weighted Composite Index rose by 0.5 percent in March, helping the index grow by a total of 1.4 percent for the quarter.
Hedge funds have been getting bad press in recent months. They have been criticized for charging high management fees with little to show by way of returns on investment. Last year was especially harsh with an average gain of only 3.3 percent compared to the S&P 500’s gain of a solid 12 percent.
Lead manager John Tilney will be retiring from his position at Armajaro Asset Management LLP, a hedge fund based in London. The fund became known as the “Chocfinger” hedge fund due to its former purchasing of 7 percent of the world’s cocoa supply
Tilney, who is 60 years old, joined Armajaro in 2004. A former verteran commodity trader at Glencore, he came to Armajaro to establish the flagship Armajaro Commodities Fund. He plans on leaving his post and becoming an advisor this April. Oliver Denny, a co-manager at the fund, will take Tilney’s place.
Mr. Denny remarked: The next phase of the commodity cycle will be very interesting, and I believe it will provide some excellent investment opportunities for ACF.”
Founded in 1998 by Anthony Ward, the British press gave the fund the nickname “Chocfinger” in 2010 after it bought about 240,000 metric tons of cocoa from London’s NYSE Liffe exchange. At the time it was about 7 percent of the entire world supply.
The move comes after a time of loss. During the 15 months preceding the closing of 2013, the most recent year for which there are accounts available, the group holding company recorded a loss of $103.4 million after taxes. The accounts show that the shortfall was “predominately due to losses within the Armajaro Trading Limited subsidiary.” During that time frame the highest paid employee at Armajaro received $19.6 million in compensation.
Andy Redleaf, CEO of Whitebox Advisors, sent an internal memo last Sunday expressing worry that he sees signs of another crash on the offing, similar to that of 2007.
The memo, which was obtained by CNBC.com, quotes Redleaf as saying: “I think it is a truly scary time.” Whitebox manages $4.2 billion in assets.
Specifically, Redleaf is fearful that the stimulus to place new money in markets resembles too closely the lower credit standards that were in effect in the housing market right before that sector crashed and burned in 2007.
“We do not know exactly where all the credit creation of this cycle has gone. Certainly money sits idly as excess reserves, but just as certainly money that would not exist but for unconventional monetary policy has distorted prices and resource allocation,” Redleaf wrote.
Redleaf mentioned the oil market, which reached a high of around $100 a barrel before the price slid into the abyss of $43 per barrel today. He stated that the high price could have been caused by China “buying on easy credit” as well as other floods of money going oil producers who turned that money around into abundant supply, thus drastically lowering the price.
He noted additionally that the stock market might also be inflated in a similar way by sovereign wealth funds and the Swiss central bank’s ownership of large amounts of equities.
“There are some parallels with the collapse in home prices which preceded the financial crisis,” he explained.
Nine years ago Redleaf predicted the coming financial crisis, so it may be worthwhile to pay attention to his fears. In a letter he wrote to investors in December 2006 Redleaf stated:
“Sometime in the next 12 to 18 months, there is going to be a panic in credit markets. The driver in the credit market panic of 2007 or 2008 will be a sudden, profound and pervasive loss of faith in the alchemy of structured finance as currently practiced.”
Crispin Odey, one of the world’s most respected hedge fund managers expressed concern that economies that depend on China for their income are on the path towards recession. He further cautioned that central banks will not be able to save these economies since their supply of policy tactics have already been played out.
Odey is the founder of Odey Asset Management, a London-based firm, which has bought short positions on Australia in keeping with his bearish view of China’s growth potential for the near future. He has shorted Genworth Mortgage Insurance Australia and Fortescue Metals Group, a sign that he is anticipating a fall in their share values. He also expects the Australian dollar to plunge. Odey said that he is anticipating that banks in Australia are about to encounter “a bad time ahead of them.”
“China is everything to Australia in lots of ways,” Mr Odey told The Australian Financial Review.
What are the most notable trends the smart money is betting on now? An analysis by one of the top investment firms in the country examined 850 hedge funds and more than 700 mutual funds which are actively managed and discovered the three following qualities of these investments.
1. Most funds seem to believe the stock market is continuing its upward climb for the near future. The research shows that 57 percent of the funds’ investments are betting that the stocks will go up, as opposed to shorting which bets that the stock will fall. That percentage is a record high, which is a good sign that at least the managers believe the market is not on the verge of crashing. The survey also showed that mutual funds have only 3.1 percent of their holdings in cash; lower than average over the past ten years. Another sign of a bullish market
2. The survey showed that fund managers believe consumers will be spending their $750 savings on their gasoline. The largest single sector which managers are betting on is the so-called consumer discretionary stocks. Those are companies that manufacture consumer goods like clothing and furniture.
3. The research also revealed an interesting fact: both hedge and mutual funds seem to be betting on 11 similar stocks, which were found in their top holdings. The investment firm calls these stocks the “VIP list.”
• Actavis (ACT)
• American International Group (AIG)
• Citigroup (C)
• EMC Corp (EMC)
• Facebook (FB)
• Gilead Sciences (GILD)
• Google (GOOGL)
• JP Morgan (JPM)
• MasterCard (MA)
• Medtronic (MDT)
• Priceline (PCLN)
According to data fom SS&C portfolios, the number of requests by investors to withdraw their money from hedge funds was up this month compared to February in 2014.
The SS&C GlobeOp Forward Redemption Indicator is a way to quantify the number of withdrawal requests compared to the amount of assets under management, expressed as a percentage. In February 2014 the percentage of withdrawal requests was 2.49 while this year, in February 2015 the amount was 3.64 percent of AUM.
SS&C Technologies is a fund administrator which collects the data which is provided by their fund clients. Those clients represent about ten percent of all assets invested in hedge funds.
According to regulatory filings required by the Securities and Exchange Commission, David Einhorn now owns 5.8 percent of Consol Energy. SEC rules obligate investors to report when they acquire at least 5 percent of a company.
Hedge fund manager Einhorn first invested in Consol during the third quarter of 2014. At that time he bought 2.7 percent of the energy company’s outstanding shares. At the end of this year Einhorn added to his bet, bringing his stake up to 5.8 percent as of December 31, 2014.
Einhorn is well known for his short bets on Keurig Green Mountain, Allied Capital and Lehman Brothers. He is also criticized Apple Inc publicly after they announced in March 2012 a plan to return to shareholders $45 billion of its enormous cash stash through share repurchases and dividends, saying that sum was not nearly enough money for their investors. Einhorn eventually got his way when Apple revised their plan in 2013. The return program was for shareholders to get back $100 billion over three years in dividends and repurchases.
Concomitant with his increased investment in Consol Einhorn also reduced his stake in Apple. His hedge fund, Greenlight Capital, sold off 566,500 shares of Apple in the last quarter of 2014, according to SEC filings. As of the end of 2014 Greenlight held about 8.6 million shares of Apple. That amounts to 12.6 percent of Greenlight’s portfolio, its second largest holding.
Many in the market have had concerns that leveraged exchange fund trades could create market volatility – a new study explains that these concerns are misplaced. As two Federal Reserve Board economists explain, capital flows actually reduce the need for ETFs to buy and sell assets to match movements that are happening in benchmark indexes. This counters the potential for ETF Volatility to be a problem in the financial markets, as the authors explain.
The study was done by Fed economists Ivan Ivanov and Stephen Lenkey. As they wrote, “These products have been heavily criticized based on the belief that they exacerbate volatility in financial markets. We show that concerns about these types of products are likely exaggerated.”
As they explain in their conclusion, “ETFs are generally considered to be inexpensive and tax efficient investment vehicles. Because both the ETFs and their underlying portfolio are traded, they provide an ideal platform with which to examine the benefits of liquidity improvement. The latter occurs when the ETF is more liquid than its underlying portfolio. In this paper, we document the extent of liquidity improvement across a large cross-section of U.S. equity funds. Importantly, we investigate the role of liquidity improvement (and its two components) on ETF flows and mispricing. Our findings have broad implications for investors and ETF providers world-wide, particularly in Europe where ETF liquidity is fragmented across multiple exchanges, not to mention across multiple cross-listings, and where much of the trading in ETFs occurs over-the-counter. Our results demonstrate that liquidity improvement is not something that every fund can claim to offer. While the average fund has a positive liquidity improvement in spreads and in turnover, the liquidity improvement in spreads and in price impact are negative for the median fund, implying a significant amount of skewness in the cross-section of funds. There is also a great deal of variations across sub-groups of funds based on size and sector.”
For more in-depth information, you can read their white paper.