Unstructured Finance

Greenlight’s David Einhorn slams Fed, again

David Einhorn

David Einhorn is pointing at you Fed

Greenlight Capital’s David Einhorn, one of the most closely followed managers in the $2.2 trillion hedge fund industry, is out with his latest investment letter and provides another lambasting of the U.S. Federal Reserve for what he describes as short-sighted policy decisions with regards to its continued quantitative easing.

“We maintain that excessively easy monetary policy is actually thwarting the recovery,” Einhorn said of the Fed and its decision to continue buying $85 billion a month in Treasuries and mortgage-backed securities. “But even if there is some trivial short-term benefit to QE, policy makers should be focusing on the longer-term perils of QE that are likely far more important.”

Einhorn says the Fed’s bond buying prompts some questions about income inequality and the ability of central bankers to deal with the next recession. Specifically, he asks in his letter:

* How much does QE contribute to the growing inequality of wealth in this country and what are the risks this creates?

* How much systemic risk does the Fed create by becoming what Warren Buffett termed “the greatest hedge fund in history”?

Hedge funds vs. darts

By Matthew Goldstein

The Wall Street Journal used to run a feature in which some of its staffers would periodically pick stocks by throwing darts against a target. The idea was to see how many times stock picking by pure chance could outperform the picks of a bunch of experts.

The WSJ ended the popular feature several years ago but maybe it’s time from someone to bring it back and this time use darts to try to outperform some of top hedge funds managers. That’s because with the average hedge fund up about 1.2% during the first-half of the year, it would seem an investor on his or her own could do just as well picking stocks blindfolded.

Indeed, with the S&P500 up about 8 percent for the first half, the 3.7% gain for David Einhorn’s Greenlight Capital and the 3.9% gain for Dan Loeb’s Third Point don’t look so robust on second glance.

SAC Capital: a look back in time

By Matthew Goldstein

The full year numbers aren’t in, but it appears Steve Cohen’s SAC Capital had a pretty good year–especially compared to most other long/short equity hedge funds which lost money. But how does this year’s 8% gain stack-up against other strong years posted by the Stamford, Conn. hedge fund?

As we reported previously on UF, a good chunk of SAC Capital’s trading prowess in 2011 is being credited by sources to a single team led by Gabe Plotkin. His $1.2 billion book is one of the largest at SAC Capital and has generated between $150 million and $200 million in profits.

Indeed, only Cohen’s own 2 billion book–called the “big book,” the “Cohen account,” or simply “COHE”–is believed to manage more money at the $14 billion fund.

Absolutely Fabulous?

Among the side-effects of the financial crisis, the importance for European wealth managers and other intermediaries of both managing investors’ expectations and understanding fully what those expectations are, has been underlined.

This is not entirely new. The rise of absolute return products largely reflects intermediaries’ efforts to deal directly with client expectations that, for many, have taken a severe blow. It is worth looking back at the level of inflows to funds seeking absolute returns before and after 2008 (the nadir for the industry in terms of sales activity) to see how this has evolved.

To view the chart, click here.

The data not only show the relative level of in- and out-flows for absolute return funds in Europe since 2005, but serves as a means to illustrate how activity has shifted in Europe.

David Einhorn’s nothing month

By Matthew Goldstein

If numbers told the entire story, one might conclude that hedge fund manager David Einhorn took the month of May off.

That’s because Einhorn flagship fund at his Greenlight Capital registered a big nothing for the month. In other words, Greenlight’s flagship fund registered a zero percent gain/loss, according to my colleague Svea Herbst-Bayliss.

Of course, May was a very big busy month for Einhorn. At the annual Ira Sohn charitable event, Einhorn unleashed a blistering attack on Steve Ballmer, in which the 42-year-old hedgie called for the ouster of the Microsoft chief executive officer. Then, the very next day, Einhorn announced he had reached a deal with New York Mets owner Fred Wilpon to buy a minority stake in the Major League Baseball team for $200 million.

Are marathon runners trying to sprint?

“The long is short. Investment choice, like other life choices, is being re-tuned to a shorter wave-length.” So stated Andy Haldane of the Bank of England in a speech last month.

If one of the key features of a mutual fund is that it is a long-term investment, then concerns that money is being managed over decreasing time horizons should be treated seriously.

This concern was made all the more potent as it followed soon after a European Commission green paper also pointed to this issue with this comment: “It appears that the way asset managers’ performance is evaluated and the incentive structure of fees and commissions encourage asset managers to seek short-term benefits.”

Hedge funds vs mutual funds

By Dunny P. Moonesawmy, Head of Fund Research for Lipper in western Europe, Middle East and Africa. The views expressed are his own.

Hedge funds took some heat from the credit crisis as liquidity and transparency became critical factors in investment decision-making. It’s fair to say hedge funds continued to deliver decent returns to investors, but how do they compare to mutual funds if we focus on performance and risk alone?

In 2008, the average return for mutual funds stood at a negative 22.91 percent. At the same time, hedge funds posted average returns of minus 8.37 percent. We might have expected a stronger rebound for mutual funds in 2009 and 2010 than for hedge funds, yet the data shows better average returns for hedge funds in both years. Positive returns in the sector stood at 22.36 percent and 18.08 percent respectively against 21.16 percent and 10.23 percent for mutual funds.

Risk revolution

By Dunny P. Moonesawmy, Head of Fund Research for Lipper in western Europe, Middle East and Africa. The views expressed are his own. LONDON, April 6 (Reuters) – The evaluation of an investment is measured by its potential performance and risk, and historically, investors have given more importance to the former than the latter. Recent events in the market, however, have challenged the hierarchy, placing risk at the heart of investors’ thinking. It is little short of a revolution in the investment industry. While performance is associated with opportunities, risk is linked with danger and the switch in thinking is prompting investors to take a more defensive approach. There have been several factors behind that change. The market is more volatile and given to quicker and more abrupt downturns; there is a polarization of economic growth outside core western economies; demographic change has led to the growing importance of liability management; and regulatory constraints have put extra pressure on institutional players to limit risky investments. Up to 1996, we enjoyed smooth growth trends in markets, with steady periods of drawdown and recovery. Over the past 15 years, however, the nature of market cycles has changed. Periods of exponential growth have been followed by deep crises, creating opportunities for hedge-fund style managers but a nightmare for long-only managers trying to protect assets. Both institutional and retail investors have had a hard time during these two crises with significant consequences on their risk appetite. For a chart detailing the recent trends, click: http://r.reuters.com/gef88r Data from Lipper shows 10.18 percent average annual growth of the MSCI World TR in dollar terms between 1970 and 1980, 16.3 percent the following decade and 15.92 percent in the 1990s. The figure stood at only 1.77 percent during the last decade due to the two major downturns — the bursting of the internet bubble and the credit crisis. When we look closely how performance was distributed for the past 15 years, we have a cumulative performance of 101.86 percent over the four years to end-1999, followed by a short but severe downturn of -50.74% from 2000 to 2002. From 2003 to 2006, the market rose a cumulative 52.93 percent in 4 years and then dived 37.24 percent in 2008 to emerge again with cumulative growth of 46.9 percent in 2009 and 2010. POLARIZED GROWTH Investors cannot time the market, much as they might try. Strong downturns are prejudicial for portfolios and over the past couple of years, the risk management component has been given a far higher rating in the evaluation of managers before investment mandates are attributed. Investors are also concerned about the polarization of growth in emerging countries. Although there are now many brokers offering their services in the region and information is more fluid, investors remain cautious due to the risks — geopolitical, transparency and geographical — associated in investing in emerging countries. They therefore tend to modify their allocations to give more accent to tactical allocation than to strategic, long-term investment. Indeed, while investors poured $25 billion into emerging market equity funds in 2010, they have removed nearly $2 billion in the first two months of this year. Another consequence of the aftermath of the credit crisis is an acknowledgement of the inadequacy of investment yields in light of the liabilities faced by insurers and pension schemes as longevity increases. Asset Liability Management (ALM) is forcing managers to look for alternative ways of increasing yields without taking too much risk. As a consequence of the credit crisis, asset allocation has been largely reshuffled away from equities as investors scrambled to get a handle on their investment risk. Alternative investment managers running hedge funds or hedge-fund style absolute return funds have been solicited by pension schemes but trustees are conscious that between ex-ante volatility promises and ex-post crisis volatility there is a big difference. As such, annualized standard deviation for hedge funds from 2004 to 2006 stood at 11.76 percent but this figure almost doubled to 22.77 percent in 2008. Regulatory measures contained in Basel III and Solvency II will also limit bank and insurers exposures to equities and create a framework where risk is at the centre of investment decisions, helping to foster a top-down approach for risk management. Institutional players and individual investors alike are putting a premium on protecting assets as well as growing them and are eyeing the market with suspicion. The shift is ubiquitous. And successful fund managers will be those who accept risk criteria are emerging ahead of future returns in post-credit crisis portfolio management. (Editing by Joel Dimmock) ((dunny.moonesawmy1@thomsonreuters.com; +33 1 4949 5009))

By Dunny P. Moonesawmy, Head of Fund Research for Lipper in western Europe, Middle East and Africa. The views expressed are his own.

The evaluation of an investment is measured by its potential performance and risk, and historically, investors have given more importance to the former than the latter. Recent events in the market, however, have challenged the hierarchy, placing risk at the heart of investors’ thinking. It is little short of a revolution in the investment industry.

While performance is associated with opportunities, risk is linked with danger and the switch in thinking is prompting investors to take a more defensive approach.

The Naked Truth

By Ed Moisson, Head of UK & Cross-Border Research at Lipper

Do independent asset managers perform better than bank-run funds?

Lipper was recently approached to analyse the difference in performance between funds operated by broader financial services companies (banks and insurers) and those managed by ‘pure play’ asset managers.

This research came in the wake of comments made by Peter Hargreaves, founder of IFA Hargreaves Lansdown, who said in September that many funds in the UK run by banks were “seriously crap”.

With the temperature apparently rising, it might be a little foolhardy to enter such a debate. Yet objective analysis is surely where independent fund researchers can best provide a useful contribution. Besides, it might be gettin’ hot in here, but I for one will not be takin’ off my clothes.

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