Performance anxiety

July 11, 2013

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On the same day the the SEC lifted its ban on hedge fund advertising, Bloomberg Businessweek’s cover story declares: “Hedge funds are for suckers”. Hedge funds are trailing the S&P by 10 percentage points this year, Sheelah Kohlhatkar writes, and they’ve underperformed the MSCI All Country World Index for five of the past seven years.

Bizweek’s piece is the just the latest in the Why The Hell Would You Invest In A Hedge Fund genre — The Economist, Marketwatch and the WSJ have all weighed in recently, and Felix had his own version last year, riffing off this book by Simon Lack.

To Matt Levine, talking about beating the market misses the point. Hedge funds are generally sold as a separate asset class, rather than being a way to maximize your returns in, say, stocks. A hedge fund, he writes, can sell on things like “uncorrelated returns, or of risk parity, or of alpha generation on a factor model that matters to your investor.” In the end, hedge fund managers aren’t judged by the degree to which they over- or underperform the S&P 500; they’re “held to what you can sell, in your private meetings with investors”.

In May Noah Smith argued a similar point about judging hedge funds: investments should be judged by both returns and by risk.  “A number of top hedge funds have earned lower returns than the market since the financial crisis, but with much lower risk,” he writes. Smith notes, however, that even after for accounting for risk, hedge funds have still underperformed as an asset class.

When judged against other alternative investments — things like silver futures, REITs, even a 2004 Chateau Pavie Bordeaux — Bloomberg Markets reports that hedge funds have been among the worst performers over the last three years, returning just 3.3%. Funds-of-funds were deep into negative territory, falling by an annualized 3.7% over the same period.

Now that hedge funds can advertise, it’s unclear whether they will do so en masse. One industry leader thinks it’ll largely be used by smaller funds who “can’t get capital from anywhere else”. Another thinks many huge funds — the D.E. Shaws, the Blackstones and the Bridgewaters — will need to advertise to keep growing. Felix, meanwhile, thinks that the ads aren’t the most important thing in the latest SEC ruling. If it causes greater transparency online, he writes, that may end up being good for the industry.  – Ryan McCarthy

On to today’s links:

Financial Arcana
How Deutsche Bank made loans magically disappear from its balance sheet – Bloomberg

Charts
Obama’s economic case for fixing immigration in 3 charts – WaPo

Primary Sources
The full text of the Warren-McCain bank regulation proposal – Elizabeth Warren

Oxpeckers
Confessions of a former CNBC pundit, who felt pushed to constantly make the “optimism case” – Forbes

Growth Industries
Why quinoa is not taking over the world – WaPo

Regulations
Regulators actually hit their deadline on cross-border derivatives regulation – Ben Protess

Hobbies
The CIA kept the accused 9/11 mastermind sane by letting him design vacuum cleaners – CBS

Wonks
Why we should tie the US minimum wage to average wages (hint: it accounts for productivity gains) – John Schmitt

Yikes
Rent in Brooklyn rose 14% last year – Bloomberg

Awful
Texas’s new laws may already be driving women to illegal flea market abortions – Bloomberg

Poor Bankers
“If I’m not taking clients out, I can barely afford an entree and a glass of wine in the evening” – WSJ

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