The risk pool, that is. According to a Goldman Sachs study, hedge funds’ exposure to equities peaked in March, 2007 at 52% net long and bottomed at 17% in September, 2008. As of the end of 2009 hedge funds were back up to 42% net long, not far from their 2007 credit bubble levels of irrational exuberance.
Category: hedge funds
As reported on Bloomberg today:
Stock hedge funds fell an average of 8.6 percent in September, the biggest one-month loss since Hedge Fund Research Inc. began collecting data in 1990. While that was better than the 12 percent decline by the MSCI World Index, a benchmark for global stocks, industry analysts expect investors to increase their requests to pull money from funds.
“The poor performance of certain hedge funds will have repercussions in the allocation processes,” said Taco Sieburgh Sjoerdsma, head of research at Liability Solutions Ltd., a London-based investment consultant. “It may lead to substantial shifts between hedge-funds strategies and between hedge funds.”
So much for the “defensive” attraction of the typical hedge fund:
Funds in all investment categories fell 6.9 percent in September, according to Hedge Fund Research’s Global Hedge Fund Index. That’s the worst month for the $1.9 trillion industry since August 1998, when the Russian debt default triggered the collapse of Long-Term Capital Management LP. Losses came even as many managers sought to sidestep the tumble in equity prices by holding more cash, cutting borrowing and reducing their bets on stocks expected to rise.
Government manipulations like the ban on shorting financials have had unintended consequences:
Restrictions on shorting stocks in the U.S. and U.K. put in place on Sept. 18 hamstrung funds that could no longer bet on falling prices of 15 percent of the companies in the Standard & Poor’s 500 Index. Energy and materials shares, which many hedge funds had been expecting to rise, were some of the worst performers in the month, with the S&P 500 Materials Index down 17 percent and its Energy Index down 12 percent.
Price swings also made trading difficult, investors said. The S&P 500 rose or fell more than 4 percent on six trading days in the month, compared with once in the previous eight months.
My comments: As the credit crisis unfolded last Summer the majority of alpha seeking hedge funds piled into commodity related assets yet stayed at the party a little too long. Adding insult to injury were the highly levered players which shut down earlier this year after losing 25-35% in Q1 and Q2. I would not be surprised if the industry contracts by 50% over the next 6 months as yield chasers learn an expensive lesson, aka “alphaless”.
According to an article on Bloomberg today, Ken Heebner hopes to launch his first hedge fund raising $5 billion. This got our contrary juices flowing with several bells ringing:
- Hot portfolio manager becomes hot commodity among the mainstream financial media. (not the least bit influenced by all the money his firm spends on fencing ads!)
- Assets in his flagship CGM Focus Fund more than triple from $2.9 billion to $10.4 billion from June 30, 2007 to June 30, 2008, coinciding with a boom in commodity-related stocks. (Heebner runs a concentrated portfolio with 93.5% in such stocks as of March 31.)
- After nearly 4 decades in the business, he decides to raise $5 billion in a hedge fund…
- …despite the fact that his fund is down 29% in the first 10 weeks of Q3.
- The Bloomberg reporter is very blasé about this recent implosion.
- And investors are unfazed, apparently buying the dip, to the tune of $700 million in inflows during Q3. (CGM Focus Fund should be down to $7.4 billion with the 29% loss, yet is reported at $8.1 billion in assets.)
My comment: You just can’t script this much better. After a 7 year run, the commodity bear is slightly more than two months old… and by all appearances has much further to run. There is just far too much complacency.
According to Bloomberg, earlier this year Queen’s Walk Investment Ltd, a structured finance hedge fund managed by Cheyne Capital dropped over 22% after disclosing substantial losses in subprime mortgages. Today another vehicle managed by Cheyne announced a liquidation of their $20 billion commercial paper program.
The program, called Cheyne Finance LLC, is a structured investment vehicle that purchases securities by issuing short-and medium-term debt, S&P said in a statement today. It breached a test based on losses in the portfolio that may force liquidation, S&P said. London-based Cheyne Capital is the portfolio manager.
The Cheyne portfolio is primarily invested in “real estate securitizations” and none of the assets have had downgrades, S&P said. Structured investment vehicles often aren’t backed by credit lines from banks like asset-backed commercial paper programs, of which there is $1.05 trillion outstanding.
S&P cut the credit rating on the commercial paper issued by Cheyne Finance by two levels to A-2 from A-1+. The rating on senior debt was reduced six levels to A- from AAA, the highest rating.
My comments: Another hedge fund seemingly posting above benchmark returns in a mark to model world is forced to mark to broker. The great unwind saga continues.