It’s all relative

“You won’t learn much about capitalism at university. How could you ? Capitalism is a matter of risks and rewards, and a tenured professor doesn’t have much to do with either.” – Pournelle.

The first half of the Bloomberg headline looks shocking: “Hedge funds have worst first-half performance in 18 years..” But the second half is an absolute peach: “..dropping 0.75%”. Plenty of equity market investors would be glad to have tolerated anything like that level of negative returns. We once wrote a satirical piece entitled ‘Armageddon of horrifying carnage as hedge fund index falls 0.03%’ – life now seems to be replacing art. In the spirit of not having anything more positive to say about the markets, the original is reprinted below. There is a good chance it will be reposted every time financial reporters refer somewhat indiscriminately to the high risk attributes of hedge fund investments (compared, say, to stock markets).

They live in a high-octane world. What they do is risky. They’re grotesquely overpaid, they have few scruples, and their influence is out of all proportion to their true size. They’re fast, extremely short-termist and utterly unregulated. Yes, they’re journalists writing about hedge funds.

Speculative features on hedge funds continue to surge in popularity. Once the preserve of rich sophisticates, hedge fund articles have mushroomed from a niche position in boutique publications into blanket coverage across quality newspapers and also The Daily Mail. Some commentators believe that with such explosive growth in the sector, problems are inevitable.

“These guys are opportunistic,” says hedge fund manager Peter Madeupname,

“They are constantly on the search for new commissions, and they have very little discipline.”

Hedge fund journalists can and do employ a wide variety of clichés. By and large, they engage in high speed, computer-aided jeremiads to take advantage of the gullibility of slower-witted buyers. These strategies have certainly worked in the past: since 2000, column inches devoted to hedge funds have increased by 153% per annum versus minus 78% for pieces on more conventional assets. Is the flood of journalists into this space tantamount to a gold rush ? Certainly, hedge fund journalists tend to move in herds and crowd out more traditional commentary.

Recent wild swings in investor pessimism have been attributed in part to the speculative features of hedge fund journalists. Hedge fund journalists have a market impact way beyond their true numbers, mainly because they write so much – some commentators believe they account for half the financial commentary in tabloid publications, and for three-quarters of “turnover”, the term used when bored readers rapidly turn over the page in search of something slightly more substantial, grounded in reality or worth reading instead. Their impact is also because they often employ hyperbole, a strategy which magnifies the impact of their articles. Some journalists have suggested that hedge fund managers boil babies in acid. Others, that hedge funds represent an unfair challenge to equity fund managers, in that they offer the possibility, however slight, of a positive return.

Meanwhile, competition among hedge fund journalists is increasing as more and more speculative pieces are created. There are particular concerns about the way hedge fund journalism is now packaged and sold to retail consumers. Some editors are buying senior pieces which are relatively stable and high quality, but many are buying more junior pieces which are often haphazardly constructed and of dubious worth.

There are now as many as 13,000 critical articles circulating in the marketplace, not all of them commissioned by tabloid editors, compared with just 15 ten years ago. That’s making it ever more difficult for hedge fund journalists to find an edge, and forcing them to use ever riskier high speed strategies to get their features into print. In a rumour-driven market beset by supply, some editors are even returning commissioned pieces.

As new hedge fund journalists spring up to fill apparently insatiable retail demand and as competition among them increases, the risk of less reputable or just plain untalented hedge fund journalists entering the field rises. As things stand, hedge fund journalists are unregulated. Some commentators suggest that planned regulation of hedge fund journalists simply won’t work. In Europe, where there appears to be greater appetite for hedge fund journalistic vehicles, there is still a lack of the necessary skills to analyse them properly. A lot of interest in hedge funds by journalists is deemed to be superficial. Many analysts have also voiced concern at their massively derivative nature.

John Authers, writing ‘The Short View’ for the Financial Times, points to the separate underperformance of stock markets after inflation (the real return on the S&P 500 Index since 1998 is now below zero; so much for ‘stocks for the long run’): “In spite of long periods in the doldrums, stocks are a better long-term inflation hedge than anything else.” But in discussing “anything else” he only cites the long term returns from bonds, admittedly less than half that from stocks across all markets. A portfolio approach that only embraces the limited options of equities or bonds is evidently not up to the task of preparing for the extremes of either inflation or deflation – both of which, perversely, are more feasible now than in the recent past. And while hedge funds may have recorded their worst first-half performance in almost two decades, that average year-to-date loss of 0.75% stacks up rather well against the genuine disaster of most equity markets and most individual stocks this year, even if we are now faced with the alluring possibility of a bear market rally triggered by a correction in the oil price. It also does not report the positive performance of many individual hedge funds, particularly those in the systematic trend-following and global macro sectors. The debate stalls because hedge funds do not have, in general, a sufficiently lengthy track record to bear comparison with the asset classes of equities or bonds. The CSFB / Tremont Hedge Fund Index, for example, only dates back to 1994, and the Hedge Fund Research indices to 1990. But we have to work with what we have, and a track record of almost 20 years is better than none. And individual hedge funds, of course, require an additional level of due diligence and research beyond that consistent with selection of a managed long-only equity vehicle. A shame, though, that hedge funds are still often perceived as riskier in general than equities, when the truth from 2008’s year to date return profile, albeit in general terms, would seem to point in exactly the opposite direction.


Originally published at The Price of Everything and reproduced here with the author’s permission.Related RGE Content:1) Measuring Hedge Fund Performance: Is the Time Ripe for a Common Set of Reporting Rules?2) Hedge Funds and Private Equity Funds Reeling: What Are Brokers’ Exposures?

3) Hedge Fund Investors Survey: Where Will Investors Put Their 2.9 Trillion?