“Hedge funds have made massive mistakes. We are less and less willing to invest with these people because at the point when you need them the most, they’re worth the least.”

-George Feiger, chief executive officer of Contango Capital Advisors, wealth management arm of Zions Bancorporation. Feiger manages $3.3 billion at Contango and Western National Trust Co.

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In 2008, the hedge-fund industry had ~$2 trillion under management. But as Economist’s Buttonwood points out, that year was an annus horribilis for the hedge-funds. “The average performance was a loss of 23%. In cash terms the loss for that single year was more than double the industry’s total assets under management in 2000.

This is detailed in a new book by Simon Lack titled The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True. Mr Lack reckons that hedge funds have lost enough money in 2008 to cancel out the entirety of profits made in the prior ten years.

Mutual funds have not fared any better in 2011. Data from Morningstar shows that among 4,100 funds that invest in large-cap stocks, only 17% beat the SPX. That is the smallest percentage since 1997 beating their benchmark — the S&P500 — since 1997, when 12% beat the SPX. If we look at the percentage of funds under-performing by 250 basis, its the worst since 1998. (See chart below)

If you are looking for something to blame,  consider the unholy trinity of capital outflows, a flat 2011 market and high volatility. That was a challenging environment for hedge funds and mutual funds alike.

I suspect people are  disappointed when a mutual fund under-performs with fees of 0.75 to 1.75%. But the fee structure of Hedge fund managers — 2% + 20% of the profits — is why some of them face real trouble. Its bad enough to under perform, but institutions hate paying up for the privilege.

Perhaps 2012 is the year fund managers mean revert and redeem themselves. If they don’t they should not be surprised at massive redemptions each time their window opens.

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Click to enlarge:

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More Charts on under-performance after the jump

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All Charts Bianco Research

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Sources:
Rich managers, poor clients: A devastating analysis of hedge-fund returns
Buttonwood
The Economist, Jan 7th 2012
http://www.economist.com/node/21542452

Why 2011 Was A Bad Year For Money Managers
Conference Call Handout, Bianco Research
January 12, 2011

Hedge Funds Sit Out Stock Market Rally
Nikolaj Gammeltoft
Bloomberg, January 10, 2012   
http://www.bloomberg.com/news/2012-01-10/hedge-funds-sit-out-rally-with-speculation-on-stock-gains-close-to-09-low.html

Mutual Funds Trail S&P 500 Index Most Since ’97
Lu Wang
Bloomberg, Jan 10, 2012
http://www.bloomberg.com/news/2012-01-10/funds-trail-s-p-500-index-most-since-97.html

Category: Hedge Funds, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “2011: Disastrous Year For Mutual, Hedge Fund Managers”

  1. rd says:

    My understanding is that hedge funds, like mutual funds and ETFs, have been reproducing like rabbits over the past decade. It is hard to believe that thousands of managers are all brighter and better than each other as well as better than Vanguard index funds or conservative, experienced, disciplined team-oriented money managers.

    As a small investor, my basic rule is not to invest with anybody who wants me to invest with them unless I know that their fundamental business model is built around providing excellent products and services to small investors.

  2. [...] 2011: Disastrous Year for Hedge, Mutual Fund Managers  (TBP) [...]

  3. BennyProfane says:

    And, it would be nice to somehow correlate that with the amount of money those same hedge and mutual fund managers personally made in the past few years.

  4. dead hobo says:

    BR stated:

    2011: Disastrous Year For Mutual, Hedge Fund Managers

    reply:
    ——————
    I doubt it. Rather, hedge fund INVESTORS likely took it up the ass and had to provide their own lube. Managers still got paid out of management expenses. Q4 must have really sucked if you were subject to 2-20 fees as an investor. First … you lost a ton in Q3. Then, when profits were recovered in Q4 you had the privilege of paying out 20% of those profits to the manager of the fund. I don’t see any manager disasters here.

  5. dead hobo says:

    PS I made money last year. I just sell at the top when things look a little spent and toppy and the pundits think up is the only direction available. Like BR has stated … the herd is always right in the middle and always wrong at the turns. My mojo is finally back and I plan to aggressively buy the dips this year and in the future … but only on the worst most scariest days that make your stomach knot in the pit. I used to do that, got timid a couple of years ago when market dynamics changed, but now have the confidence to get back into high gear. I have a pretty good feel for how things work again and plan to exploit that knowledge for gain.

  6. bmoseley says:

    these measures for the funds are probably before fees. investors would have done worse

  7. Francisco Bandres de Abarca says:

    Huh. It would appear the HFR Equity Hedge Index performed in a manner nearly identical to the KBW Bank Index.

    (If, based upon this observation, you wish to conclude that hedge funds, many being subsidiaries of components of the KBW Bank Index, are merely vehicles designed to lasso in capital for said index component banks, rather than capitalize on investing opportunities for clients, well then, that’s clearly your own conclusion, mister.)

    We now return you to this week’s episode of Operation Bilk.

  8. b_thunder says:

    Paraphrasing Mel Gibson’s character in Braveheart, here’s the rallying cry of the hedge fund managers to their investors:

    “You can take what remains of your investments in our funds, but you can never take our 2 + 20!”

    P.S. unless it’s 2008/09 and you can’t get your money PERIOD.

  9. cognos says:

    This type of thinking is simply non-sense.

    1) “the average investor or fund did poorly or average” – Duh! This is simply a truism.

    2) “its horrible, the average hedge fund lost 23% in 2008″ – Uh? The SPX lost 40%. A number of major banks and financials (Bear, AIG, Lehman, Fannie, Freddie… these were major “safe” $50b+ companies)… they lost >90%.

    Sounds like hedge funds did a pretty good jobs in 2008.

    Remember, while there were $2T in hedge funds in 2008… there were $20T in worldwide dev equities (down 40%) and another $20T in real estate (down how much? its not marked, or liquid at any price in Q4 08, Q1 09).

    Sound like that $2T parked in HFs is where that other $40T would love to be?!?

    Then… these things are cyclical. Sure HF have equity beta… its had a bad 10 yrs… what comes next?

    Duh!

  10. cognos says:

    Talking about “averages” is usually a recipe for non-sense and increasing stupidity.

    What’s really going on?

    1) Equities have had a poor run since 2000. (Duh?) Probably sets them up nicely for the next 10 yrs.

    2) Certain sub sectors have big problems. Look at financials – C, BAC, even GS. All simply awful. Lame large caps also have major problems — HPQ, RIMM, SHLD, JCP, TGT, WMT, MSFT, SNE, BRK/B, BP, MON, NOK, etc.

    3) Other sectors (smart tech, consumer esp luxury) are at highs or into new all-time highs either this fall or recently – AAPL, CMG, GOOG, etc (20-40% annual last 5 yrs). Other large caps are simply well-run and well managed — IBM, MCD, AZO (>15% annual last 5 yrs).

    But yeah, its fascinating that the “average” investor did “average”. I think Bill Sharpe won the nobel prize for that already.

  11. [...] Given the performance of active managers in 2011 they had better hope for a bounceback in 2012.  (Big Picture) [...]

  12. VennData says:

    Extra layer of fees.. er… a… Fund-of-Funds manager Anthony Scaramucci

    http://www.skybridgecapital.com/our_firm/our_team

    Was an Obama Supporter…

    http://dealbook.nytimes.com/2011/10/02/others-go-but-buffett-stays-on-side-of-president/

    …shifts to Romney.

    Is the Grey-Poupon crowd looking for someone to blame for their poor performance? or is it more “For God sakes we only have these successful, job-creating Bush tax cuts for only eleven more months, we need to do something!”

  13. Randel says:

    Looks like the Big Hedge Funds = the Big Box Store’s business plan.

  14. Francisco Bandres de Abarca says:

    Why the heck is ‘cognos’ referencing the performance of the ‘average’ investor so?

    Are hedge fund managers so well reimbursed in the expectation that they will perform in an average (or sub-par) manner?

  15. kris says:

    Hedge Funds are good at taking advantage of volatility, but not at nano speed volatility. HFT guys are simply faster than Hedge Funds. Game over.

  16. Surprisingly Businessweek reported that investors may add $80 billion of new capital to hedge funds in 2012. Here are the details:

    http://www.insidermonkey.com/blog/2012/01/17/2012-the-year-of-the-hedge-fund/

  17. [...] 2011: Disastrous Year For Mutual, Hedge Fund Managers [...]

  18. cognos says:

    Francisco… my point on “average investors” or even “average hf investors” is that they will ALWAYS get “average returns” in the long-run. This is simply a TRUISM. Its basic arithmetic. We cannot have “average investors” getting wonderful returns, now can we?

    Its like saying everyone is great, beautiful, rich, happy. Welcome to cultish promises.

    There are some great hedge funds with outstanding LT returns and investors many investors in them have made 10x, 100x or even closer to 1000x their original investment. (just like stocks, private businesses and real estate!)

    RenTec >30% ann net returns, >30 yrs, ZERO down years.
    SAC ~30% ann net returns, since 1992, 1 single down year… 2008, down 20%
    Elliott 12% ann net returns, since ~1975, 2 down years… both not worse than -5%
    Viking 18% ann net returns, since 1999, 1 down year… I think -3% in 2008
    Soros (from 1965 to 2000) ~30% ann net returns, 1 single down year, I think 1999 or 2000… then closed.
    Millennium ~15% ann net returns, since 1993, 1 or 2 down years since 1993, neither is worse than -5%

    All those funds have >$10B under management. Many charge very high fees, like 5/25 or even SAC 3/50 (returns are ALL NET OF FEES).

    Some other very interesting funds / periods… Eddie Lampert did something like 35-40% net his first 15 years from 1995 to 2000. One original investor was a billionaire from industry said, “I made myself more than $1b in business. Eddie made me more money than I ever made myself”. Check out how much money Eddie has made in AZO alone (he is a listed holder, last 10+ years). SHLD has worked out less well.

    Of course, Paulson made something like $20B in profit in a single year for his investors because of the subprime bet and speciality funds built around it. He has a low vol 10% annual return fund that he had grown to about $5B prior to 2006/07. With about 10 years, 10-11% net returns, zero down years.

    LonePine also had an enormously successful run… doing >20% net for 10 yrs from 1995 to 2005.

    These are all HIGHLY VISABLE $10B type fund organizations. There are MANY SIMILAR profiles in under the radar funds and portfolio teams that WANT NO VISABILITY, typically because the strategies they run are capital constrained and highly niche. Like say, “utilities LS” or “Gold LS” funds where once a managed has $1B… he simply does his 20-40% and returns capital each year.

    But yeah… professional investors do no better than the little guy. I read it in a magazine somewhere. You cannot beat the market, its impossible.

    MY PREDICITION — there will continue to be “below average”, “average” and “far far above average investors”.

  19. [...] behavioral economics, and more were batted about. One of the questions that came up was fund manager under-performance. Starting with the usual data points — 80% of managers miss their benchmark — we then [...]