Money managers under the microscope
40 years on…
Back when the hedge fund industry was barely into its 20s, numbered just 150 funds and managed all of $1 billion, you might have thought times were simpler; untroubled by the kinds of questions and concerns that now dominate after a turbulent year.
Browsing through a 1969 article in Fortune magazine by Carol J Loomis you could be forgiven for concluding the industry has barely moved on. If the last year has seen the painful payback from a frantic pursuit of returns, then so it was 1969.
Loomis cites the founder of the first hedge fund , Alfred W Jones:
“The trouble began, he says, in the 1966-68 period when the craze for performance swept the investment world and when all sorts of money managers, including those in his own shop, got overconfident about their ability to make money.”
The losses suffered by hedge funds in 1969 were sharp and shocking. The Fortune article notes hedge funds with losses of up to 47 percent and points to a series of players underperforming the broader market despite the so-called cushion that short-selling provided. Average hedge fund performance in 2009 has outpaced that of wider equity markets, but we are still hearing today the same questions that Loomis felt drawn to pose:
“The debris of 1969 has naturally prompted some hedge fund investors to ask just what is it that the hedge-fund concept is doing for them. If short-selling does not afford protection in a down market, then why short at all. Why not instead retreat to cash when the market looks bad?”
On regulation too:
“It is hard to say what the SEC will do, and it is even hard to form an opinion as to what it should do. Probably the hedge funds deserve to be regulated in some way, but whether they should be ravaged is another question.”
There are signs that despite heavy outflows from hedge funds, pension funds and other large investors are prepared to stick by plans to invest in the sector, maintaining a steady stream of money in the other direction. The industry is more diverse and robust than in the early 1970s — when a double bear market effectively brought about a quasi-hibernation until the 1980s. A quasi-hibernation that Loomis appeared to predict alongside some early, and eerily familiar, barbs aimed at the hedge funds’ unique fee structure:
“If wealthy, sophisticated investors wish to pay 20 percent of their profits for investment management — or as one dejected investor put it, are ‘foolish’ enough to pay 20 percent — then quite possibly they should be allowed to do so. Anyway, it could be that after 1969, not so many will be in that magnanimous a mood.”