Counterparties: Sinking alpha

January 4, 2013

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This is the state of the hedge fund industry in 2012: The most profitable fund in the world underperformed a simple S&P index fund.

Steve Cohen’s SAC Capital, marred by insider trading investigations, made it to the top of Bloomberg Markets’ ranking of the most profitable hedge funds this year, not because of performance but because of fees. Instead of the usual 2 and 20 fee structure, SAC reportedly charges a 3% management fee and as much as 50% of its clients’ profits.

If you’re wealthy enough to invest directly in a hedge fund those fees are particularly grating: SAC was up 10% last year, Bloomberg reports, versus a 13.4% gain in the S&P. And that’s good, by hedge-fund standards. This year, Reuters reports, the average hedge fund returned just 3.17%.

2012 was a year when nearly everyone on Wall Street got it wrong:

Even the largest banks and most-successful investors failed to anticipate how government actions would influence markets. Unprecedented central bank stimulus in the U.S. and Europe sparked a 16 percent gain in the S&P 500 including dividends, led to a 23 percent drop in the Chicago Board Options Exchange Volatility Index, paid investors in Greek debt 78 percent and gave Treasuries a 2.2 percent return even after Warren Buffett called bonds “dangerous.”

On the whole, it’s been a terrible decade for hedge funds. The Economist notes that a “simple-minded investment portfolio” — 60% stocks and the rest in sovereign bonds — would have returned 90% over the last 10 years. Hedge funds, after fees, returned just 17%. Those paltry returns are increasingly hitting everyday investors: “Nearly two-thirds of the industry’s assets are now drawn from pension funds, endowments like the Nobel Foundation and other institutional investors, up from just 20% a decade ago.”

You’d think investors would, at some point, start figuring this all out. But according to Nathan Vardi, exactly the opposite is true. The long-term flow of cash into hedge funds, including money from retail investors, Felix wrote earlier this year, shows no signs of slowing down. — Ryan McCarthy

On to today’s links:

Why the Treasury should mint a trillion-dollar coin to save us from the debt ceiling – Joe Weisenthal
No a $1 trillion coin is not legal – Kevin Drum
We must go off the platinum cliff – Josh Barro

Primary Sources
US adds 155,000 jobs in December, maddeningly in line with estimates – BLS
The curious predictability of the jobs report – Felix

Billionaire Whimsy
Endless panels and hundreds of millions of dollars later, Peterson-ism has failed – Dave Weigel

Long Reads
The master pickpocket whose work is being studied by scientists and the military – Adam Green

Quantitative easing doesn’t lower interest rates. It raises them — Matt O’Brien
The end of economists’ imperialism – Justin Fox
We’re still waiting for an answer to the biggest question in macroeconomic theory – John Quiggin
The IMF’s top economist admits he misunderstood how austerity kills growth – Wonkblog

EU Mess
Spain has started draining its citizens’ social security fund to buy its own bonds – WSJ

A really good explainer on how Obamacare will affect you – Aaron E. Carroll

The SEC decides not to file insider trading charges against a former Buffett lieutenant – Dealbook

Andrew Sullivan: “There’s no sugar daddies anymore” in media – David Carr

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