The Great Debate

While the music plays funds gotta dance

James Saft

Nov 17, 2009 07:34 EST

(James Saft is a Reuters columnist. The opinions expressed are his own)

With just a few short weeks until the end of the year, look for many fund managers to take on more risk in an effort to salvage their annual return figures.

This is not about fundamentals, this is about something far more important: career risk.

Hedge Fund Research’s Global Hedge Fund index, which is broadly representative of the industry, is up just 11.9 percent year to date, while its Equity Hedge index is scarcely doing better, up 12.6 percent. The HFR Macro Fund index is actually down 8 percent, indicating the best paid minds in the business did not see the astounding emerging markets rally and dollar fall coming.

Given that global emerging markets are up something on the order of 60 percent this year, that all global shares are up 30 percent and even the S&P 500 is up 22 percent, we can conclude that a lot of managers are heading into the year-end reporting season with a lot of ground to make up.

There are also lifeboats full of institutional fund managers and mutual fund managers in the same position.

What all who have missed the rally have in common is not a common failure of analysis — there are lots of different ways to get it wrong — but a collective vulnerability to finding themselves waving their clients goodbye. Letters detailing 2009 performance will have to be posted, ranking lists of funds will be published and there will be consequences.

from The Great Debate UK:

The stockmarkets: irrational nonchalance

Laurence Copeland

Jun 29, 2009 20:59 EDT

- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

Before the credit crunch, we had what I called a Prozac market. Investors on both sides of the Atlantic seemed to be in denial, as irrational as the people who end up in the bankruptcy court because for years they have kept on smiling while the bills piled up unopened.

Last Fall, reality caught up in the shape of the worst banking crisis in history, and we have now had to mortgage our earnings for decades to come in order to bail out the banks. Not surprisingly, by mid-March this year, the Dow had fallen by well over 50 percent from its peak level at the start of October 2007, and the FTSE by nearly as much. In the last three months, however, the FTSE has risen by 20 percent and the Dow by nearly 30 percent. What has happened to justify the recovery?

The best that can be said is that there have been signs that the economic situation is deteriorating more slowly than in the second half of last year.

For example, the fall in house prices may be slowing. But in both UK and the U.S., they remain a long way above their long run levels by most yardsticks. Moreover, in the early 1990s, after the last British house price bubble popped, it took almost a decade for prices to recover, against a background of far higher inflation and a much more robust economy than today – and of course without an accompanying banking collapse.

Insofar as the construction industry is concerned, any increase in demand from the residential sector is likely to be overshadowed by continuing weakness in commercial real estate and, in the UK particularly, brutal cuts in public sector capital expenditure.

For the foreseeable future, the UK and U.S. governments, households and much of the corporate sector will be forced by record levels of debt to rein in their spending. Long term bond yields are already above 4 percent. Insuring against the risk of default costs 39 basis points for U.S. government debt, 80 points for UK gilts, and 300 or 400 points for a number of major multinationals, which clearly indicates that some financial markets have few illusions about the future.