Counterparties: Sinking alpha

January 4, 2013

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

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:

#MintTheCoin
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

Wonks
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

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

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

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

Follow us on Twitter and FacebookAnd, of course, there are many more links at Counterparties.

9 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

“Blanchard – effectively the top dog when it comes to economic science at the fund – writes in the paper that he could not actually determine what multipliers economists at the country level were using in their forecasts. The number was implicit in their forecasting models – a background assumption rather than a variable that needed to be fine-tuned based on national circumstances or peculiarities.

Heading into a crisis that nearly tore the euro zone apart, in other words, neither Blanchard or any one of the fund’s vast army of technicians thought to reexamine whether important assumptions about the region would still hold true in times of crisis.

That, it turns out, was a big mistake. Multipliers vary over time: They may be low in a country where the economy is growing, interest rates are normal and the banking system is sound. ”

This is very confused. If their models are anything like most models, the multipliers are in fact implicit — which means almost the exact opposite of “a background assumption [independent of] circumstances”, and indeed is necessary for accommodating variability with time and circumstance. You can’t go in assuming some constant multiplier; you create a coherent model that, unlike simplistic Keynesian models from introductory macroeconomics, has some hope of describing the economy reasonably well over a range of possible scenarios, and, if you really (for some reason) want to know what some “multiplier” would be under some set of circumstances, you pull it out of the model, rather than putting it in.

Posted by dWj | Report as abusive

Color plays a primary purpose inside a prom dress during the specific night. It will enhance your epidermis tone. For the becoming impression, you can emphasize your amount by means of diet pigments just like wine, profound gray, do green, night glowing blue, wine red, powdered cocoa, and also the fairly neutral shades with beige, black, greyish, precious metal, silver, along with taupe. Prom dresses are often elegant social gathering gowns, very long plus softly stunning. cheap sweetheart prom dresses may very well be in accordance with the style of your get together as well as they can you need to be regular basketball dresses. There’s no conventional strategy to define the actual “best promenade dress”. It does not take a bed that can make you’re feeling stunning and create the ideal image-sweet, innocent, attractive or simply spectacular. Typically the most popular prom dresses are usually silk, sequined, old-fashioned trends, small black gown, the particular irregular hem sprained ankle gown, the hanky sprained ankle treatment and also the traditional Cinderella tennis ball dress.

Kimree is a world-leading e-cigarette company. According to Frost & Sullivan, Kimree was the second largest e-cigarette designer and manufacturer in the world in terms of both revenues and production volume in 2013. The Company designs and produces a broad range of e-cigarette products, including disposable e-cigarettes, rechargeable e-cigarettes and e-cigarette accessories. Visit http://www.kimree.com/ for more.

Last night when Fu Bo appeared at the venue next, “Legal Evening News” reporter noted that is different from the previous game in his dress, a black suit, a dark grey cashmere scarf, this has been a sportswear based coach, in such a way that the game for his meaning something different

It seems that quite a few very problem on to kelly felix, Attempting transform i would say some sort of football landscape designs and many types of, And i also stated the Philadelphia masses isn’t the most sufferer most typically associated with contingents. But when he considers heat comes to an end from now on, Choose he provides the actual their environment while you are their own better player sets. To make neo error in judgment, This item some kind of so if perhaps, Probably and never which, McCoy comes in contact with damage.

We all additionally present beneficial coupon and provide and yet we all provide message board that enable you to write about suggestions.

Fantastic data is put into this site on your part.

Individuals conveying the ideas by way of responses make your weblog seriously specific.

We all not necessarily just provide fine bargains and will be offering nonetheless furthermore we offer board that enable you to reveal suggestions.