From New York to Nicosia

The Three Fates

Here is my attempt for 2009. In 2007, I was fairly certain of my predictions as we were looking at a credit and housing bubble of historic proportions. There was no doubt it had to burst. In 2008, I was less sure but it was pretty clear that straight down was still the direction we were headed.

In January 2009, we look at world of unprecedented turmoil and infinite possibilities so I am far more uncertain than in the past.

However I am not going to let doubt and ignorance keep me from sticking my head out again. When exactly zero dollars are stake, I am a bold man. Please jump in and correct me where I am wrong.

Of course, this is a parlor game and is not investment advice. If you take your macro-economic guidance from the blog of someone for whom domain names constitute a significant asset class, then I respectfully submit that passive index funds might be a better choice for you.

World Economy

1) The consensus Wall Street forecast that the US will have a 2nd half of 2009 recovery is some kind of bad joke. Full year recession in the -2% to -3% range for the US in 2009. I can’t see any recovery before middle 2010 at the earliest and even that is optimistic. There will be weakness for years.

The key issue is that consumers have had massive wealth destruction (stocks, homes) and have to delever (too much debt, negative savings rates). That is going to be a huge drag on consumption for a very long time and why the government is stepping into the breach with unprecedented fiscal stimulus.

Real unemployment will be above 10% for sure but since the current numbers are carefully massaged to exclude large numbers of people that are unemployed by any common sense definition (e.g. they are of working age and do not have a job), that might not be the official figure.

2) Euro-zone growth will be -2% and could be worse. It will be worse in Spain and Ireland for sure.

3) UK growth will be -2% to -3% range and could conceivably be worse. The UK is a basket case; it has all the problems of the US, but more so.

4) China will be in the 5% to 7% range which is basically a recession for them. They can’t absorb their labor force at that rate of growth. The figure could be lower but I suspect they will apply as much fiscal stimulus as they can to avoid that.

5) Eastern Europe (Romania, Hungary, Bulgaria) and the Baltics are going to have a generally tough year. I don’t know enough about their economies to know specifics.

6) Icelanders will consume more herring and fewer Range Rovers in 2009. I am recruiting for volunteers to go collect this year-on-year data since I am not sure we will find it in the back of the WSJ.

Central Banks

1) Fed Reserve will keep rates at or about zero for the year

2) Bank of England and ECB will both end up at or below 100bps by year end, probably by mid-year realistically.

Residential Real Estate

1) Continues to fall in 2009 but at a reduced rate.

2) Still looking at a 30% overall decline (far side of my 2008 predictions), maybe a little bit more.

3) This is the year Manhattan will feel the pain too. 15-20% decline vs. peak in 2007 and more to come in 2010.

Commercial Real Estate

1) This is the year the bottom falls out, particularly in retail and office. I thought it would be last year that this happened but I was early.

2) A large part of the commercial real estate problem in on the credit side where assets where bought at silly prices supported by silly lending supported by silly assumptions on occupancy and rental rates…so lots of folks will default.

3) While there is a capacity problem, it is not the insane overcapacity of the 1980s

4) The CRE folks are asking for a bailout but I can’t figure out why it is an issue of federal importance if X real estate equity investor or the related debt-holders earn the cash flows from any particular building. The building will still be there generating cash flow and housing tenants…

Your Tax-Dollars at Work

1) The government will spend phenomenal amounts of your money on bailing out financial institutions and get little in return. They should just get on with nationalizing the weakest players, write down the assets to realistic levels and then refloat them once the junk has been written down so that people will believe the balance sheets.

2) Instead, they are going through extreme convolutions (TARP, guarantees, ABS guarantees, and on and on) to support inflated asset values and pouring money into the banks that is slipping back out to shareholders, creditors and management.

Painful to watch since it will just be a more expensive way to get to exactly the same place. It is the worst of all worlds: all the costs of nationalization and much less of the cleanup. Many major financial institutions are insolvent not illiquid, so we might as well get on with the clean-up, not drag it out over a decade like Japan did.

3) I have great sympathy for the fact that Paulsen et al had to make very important decisions very fast without a playbook. But a year later, there is still not an intellectually coherent framework of who gets bailed out how much nor any transparency about it.

Given that, you can be assured that much money will be wasted.

4) There will be massive (this is the word of the day!) fiscal stimulus by the Obama administration as long as the world will finance it.

5) Overall, the government has spent or guaranteed a staggering $7T-$8T so far and is going to add a few $T more. If you count the guarantees, we doubled the size of the federal obligations in 1 year.

I think lawmakers have gone numb at this stage. $30B plus $100B of guarantees for BoA raised barely an eyebrow last week. That would have been a huge event a year ago; now, what’s another $xxB to our tab?

6) The USA is in uncharted financial waters in terms of how much it is expanding its obligations on a run-rate basis (historical context: the federal govt had a higher overall debt load after WWII relative to GDP, though the overall country debt load is at record high, relative to GDP).

If the US can maintain the world’s confidence long enough to recapitalize the financial system and stimulate the economy through the upcoming consumer economy, then it is a testament to the remarkable reserve “brand” of the US economy.

But it is in a position where it is vulnerable to its external lenders and if a lender (hint: China) eventually is forced to cut and run, the options get much tougher and painful for the US.

It will either soft-default through devaluation or strangle the economy through higher interest rates (to attract capital) and fiscal restraint.

Dangerous and interesting times, watching financial common sense go against the fact that for the last 100 years, the US economy always somehow recovers faster and stronger.

Currency

Under regular circumstances, the fact that the US is printing money left, right and center would be terrible for the dollar and in the long-term we can probably expect the dollar to devalue.

But in the short-to-medium term, I have a hard timing thinking about which currency the dollar would devalue against.

The UK is in worse shape than the US and GBP is not a reserve currency. Large parts of the EMU are in terrible shape and the euro has never been tested in a crisis (will Germany support Club Med in a crunch?). Also, qualitatively on a personal level, the Euro feels overvalued in PPP terms coming from the US. Even the less affluent parts of Europe are expensive in dollar terms for basic items and that does not quite make sense.

1) Dollar will stay stable or strengthen against the Euro. I would expect 1.15 to 1.35 to be the trading range this year

2) China will not let the yuan rise against the dollar nor will it radically devalue. Stable.

3) I have no opinion about the GBP. It has already collapsed against the Euro and fallen hard against the dollar.

Web 2.0 or whatever it is called

1) Lots of silly ‘social’ companies will die this year

2) Lots of entertainment oriented video-viewing companies will die this year, but video is here to stay in a big way online

3) But overall VCs have been more sensible than in ‘97-’01 so it won’t be the vast value destruction of the .com bust.

This time, it is their financial brethren in NY & London who have shown the world what type of value destruction real Masters of the Universe can achieve. The VCs never came close to shutting down the whole global economic and trading system and breaking every single financial market.

4) Good time to invest as competition for deals, market spaces, teams and opportunities is about to go way down. You can actually focus on building a company without a dozen clones a week.

PE

1) As predicted, 2009-2010 will be years of destruction for the companies purchased based on “everything going right forever” valuation models.

Some might drag on longer due to weak covenants but it is not going to be pretty for 2005-2007 vintage investments.

The “it’s all about the velocity of investing” nonsense is hopefully dead and buried.

2) PE will return more to its historical roots in terms of buying solid companies, though for now, re-caps and investing through the debt side appears to be more feasible.

3) How good you feel as a GP in private equity probably has a lot to do with where you are in the fund-raising cycle…some folks are going to really struggle as LPs reduce their allocation to the field.

Probably we are looking a similar situation as the last down-turn where 30-40% of firms will either wind down or become substantially less prominent over the next 5-7 years.

4) In any case, PE heads seem to have suffered from the curse of being declared Masters of the Universe in mainstream publications and lauded, applauded and feared. Like naming a stadium, it is probably the perfect contrarian indicator.

Hedge Funds

1) Good luck to the quants. They got killed in 2008 and I doubt 2009 will be much better. Their models require some predictability in markets and I am not sure they are going to get it this year.

2) Needless to say many hedge funds will fail this year, deservedly so.

The thought that there could be 8,000 to 9,000 funds capable of beating the market on a post-fee, risk-adjusted basis was idiotic. 90% of them probably should go; maybe 50% will.

Investing

These are not market timing predictions. Just things that I would consider if I had a portfolio to rebalance:

1) Long dated TIPS seem pretty attractive as they are basically pricing in no inflation forever and inflation will come back eventually given all the liquidity being created. I think this is great protection for someone who is otherwise preparing for a super-recession.

2) Treasuries are overbought. While they won’t collapse this year, there is really no upside from here

3) High grade corporate debt at 500bps+ above Treasuries seems like a good buy if you / your manager is a picker

4) High-Yield at 1500bps above Treasuries is certainly a far better deal than the exact same High-Yield was at 200-300bps above Treasuries 18 months ago.

This would be a risky bet for the bold since many of these companies will fail, but if you are bold, now is the time to buy high yield when you are actually getting paid for the risk.

As with #3, probably good deals here for the person who get deep in the financials. But I have no idea; maybe all these firms will fail.

5) I have no opinion on US equities except that they will be volatile all year. It seems like we could go through a prolonged period of uncertainty, multiple compression, and general distaste with stocks like in the 1970s.

On the other hand, Buffett made one of his very rare market calls and it was a Buy and he is the undisputed master of this domain.

So listen to him, not me.

And some more qualitative thoughts

1) Pakistan is the most important battleground in the world right now and the Islamicists are having great success. Islamabad is losing control of the NWFP; Swat is getting overrun and Peshawar is endangered. All of this is happening 100 miles from Islamabad.

2) The West feels like it is at an inflection point. The economic system has failed to a significant degree, there are powerful though immature competitors emerging in Asia, and peoples’ expectations of their future well-being will not be met. The riots in Greece and Latvia are fundamentally about economic opportunity and expectations.

These types of events have lead to political, social and geopolitical re-orderings in the past.

It could happen again or we could muddle through. But there is definitely the possibility for big change in the air, in a way that there hasn’t been since the fall of the Communist bloc.

3) There will be hearings and there will be indictments.

We have only seen the beginning because the crash just happened and we had a pro-Wall Street administration.

I will be very surprised if Washington does not deliver some heads on a stick from Wall Street by 2009-2010. As with the Pujol and Pecora Hearings, Wall Street will be brought to DC and given a good spanking and a few more tomes worth of (re) regulation.

4) The financial services sector will start deflating back to more normal standards as a percentage of economy-wide profit and employment. Slow, cyclical process that will continue until the next mega bubble (10, 15, 20, 30 years?). There will always be swash-buckling financial types making billions throughout the whole period, just like there have been in every period, but the overall industry has to contract substantially and instant deca-millionaires of the past few years will be rarer.

5) The current recession has done wonders for oil prices but does nothing to change the medium-term dynamics that demand is steadily rising while supply is not.

We will still have a crunch in the medium-term. Stock up now while it is cheap! Contango saying the same thing.

6) Ongoing theme from the past: Biotech, nanotech and artificial intelligence will revolutionize society in the next 10-30 years in a way that is hard for most to appreciate, so to some degree, we are still worrying about our horse-drawn carriages when a Ferrari is on the horizon.

I continue to prepare for the day when we will welcome our robot overlords.

7) If you are reading this blog and wondering about how high-yield might trade relative to Treasuries, you are likely already one of the 0.0001% luckiest humans to ever live.

So, don’t forget that and have a very happy and healthy 2009.

Citigroup has barred investors in one of its hedge funds from withdrawing their money, and a new leveraged fund lost 52 percent in its first three months, The Wall Street Journal reported on Friday.

Bolding mine. Full articles here and here.

From the WSJ ($)

For years, Goldman Sachs Group Inc.’s flagship Global Alpha hedge fund could do no wrong. Over the past year, it has been able to do almost nothing right.

August was the worst month in the fund’s 12-year history; it was down 22.7% last month alone, according to a recent letter to investors. So far this year through the end of August, it was down 33.4% due to bad bets on everything from the Australian dollar, the Norwegian stock market and Japanese government bonds. The letter gave no indication about how the fund was faring this month. Over the past 12 months, the fund has lost 37% of its value.

That performance is a tough pill for Goldman and the two University of Chicago alumni, Mark Carhart and Ray Iwanowski, who run the fund. The pair had garnered accolades — and made Goldman the envy of other Wall Street firms — when Global Alpha was one of the best performing of the hedge funds set up by Wall Street investment banks. Mr. Carhart, an avid cyclist, and Mr. Iwanowski were among Goldman’s highest-paid executives in recent years.

This is on top of a 9% decline in 2006 so an investor who entered in 2006 is now down 40%+ and would need the fund to return 70%+ just get to par. Tough slogging for the premier fund of the premier investment bank.

Long article from the New Yorker about the ex-Equity Derivatives head at BoA who was built a mechanical hedge fund simulator.

Worthwhile read

Kat had worked in the financial markets for almost fifteen years, but what he learned about hedge-fund fees shocked him. An investor who puts a million dollars in a fund of funds whose value goes up ten per cent in twelve months would face deductions of about sixty thousand dollars on the gains he makes. “Who wants to pay that kind of money?” Kat asked the executive who was interviewing him. “You can’t seriously expect there to be anything interesting left after somebody takes out three and thirty.” The executive was nonplussed. “I don’t know,” he said. “But they pay it.”

The executive’s firm offered Kat a job as the head of research, but he turned it down. The following year, he began teaching finance at the University of Reading, and in 2003 he became a professor of risk management at Sir John Cass Business School, which is part of City University in London. He continued to think about hedge funds. “When I became an academic, I said, ‘That’s the thing I want to investigate,’ ” he recalled recently. “Is it really possible to generate investment returns to the extent that you can take out three and thirty and still be left with something you can call superior?”

However, Kat remained skeptical. As he conducted his research on hedge funds, he became convinced that it might be possible to generate similar returns in a mechanical way and with much less effort. Two years ago, he and Palaro began to sketch out ideas for a software program that could mimic the returns of individual hedge funds by trading futures. “We may be able to do without expensive hedge-fund managers and all the hassle, including the due diligence, the lack of liquidity, the lack of transparency, the lack of capacity and the fear of style drift”—changes in a fund’s strategy—“which comes with investing in hedge funds,” Kat and Palaro wrote in a working paper about the project which they published last year.

In the London financial community, word of FundCreator’s abilities has spread rapidly. As of last week, Kat said, two institutional investors were paying to use it, and more than fifty were experimenting with it. Kat and Palaro charge their clients an annual fee of roughly a third of one per cent of the money they invest using the software—less than a fifth of what most hedge funds charge. The cost of executing futures trades must be added on to FundCreator’s management fees, but, unlike at hedge funds, investors keep all the gains they make. “Why would you pay the high fees that hedge funds charge if you are able to get the same risk characteristics, in a statistical sense, by using a dynamic futures-trading strategy?” Bas Peeters, the head of structured products at ING Investment Management, said to me. “FundCreator is potentially a very cost-efficient solution.” Pete Eggleston, the head of quantitative solutions at the Royal Bank of Scotland, one of the biggest banks in Europe, said of FundCreator, “Such approaches may revolutionize the industry in terms of providing investors with access to lower-cost investment returns.”

It is notoriously difficult to distinguish between genuine investment skill and random variation. But firms like Renaissance Technologies, Citadel Investment Group, and D. E. Shaw appear to generate consistently high returns and low volatility. Shaw’s main equity fund has posted average annual returns, after fees, of twenty-one per cent since 1989; Renaissance has reportedly produced even higher returns. (Most of the top-performing hedge funds are closed to new investors.) Kat questioned whether such firms, which trade in huge volumes on a daily basis, ought to be categorized as hedge funds at all. “Basically, they are the largest market-making firms in the world, but they call themselves hedge funds because it sells better,” Kat said. “The average horizon on a trade for these guys is something like five seconds. They earn the spread. It’s very smart, but their skill is in technology. It’s in sucking up tick-by-tick data, processing all those data, and converting them into second-by-second positions in thousands of spreads worldwide. It’s just algorithmic market-making.”

Almost by definition, there can be only a handful of genius investors, Kat continued. “And even if they are there, the chances that you will find them and that they will let you in are very, very slim,” he said. “That’s what I tell people. If you are really convinced that you can find those super managers, then don’t waste your time with our stuff. Go look for them. But if you are a bit more realistic, if you know that eighty per cent of hedge-fund managers aren’t worth the fees they charge, then the rational thing to do is to give up trying to find a super manager, and just go for a good, efficient diversifier instead.”

How CDOs work (from the WSJ $)

So investors often have to estimate the value of a CDO and have a lot of leeway in how they do it. That’s a worry for investors in hedge funds, big buyers of CDOs. Hedge-fund managers make most of their money through performance fees. This gives them added incentive to use price estimates that work in their favor, even if they might not reflect the price at which they could actually trade the CDO.

Or it could mean that the managers themselves don’t know exactly what their holdings are worth, because they are so far removed from the underlying investment. In the case of Jane’s loan, that means the CDO buyer will have a tough time gauging whether she’s a good risk or not. And if she defaults, it may take a while before that affects the value of the CDO, even though market conditions overall might have already changed.

Amid Financial Excess, a Revival of Austrian Economics (WSJ Economics Blog)

It notes that “the prices of virtually all assets have been trending upwards, almost without interruption, since the middle of 2003.” While fundamental economic improvements are at the root, “the market reaction to good news might have become irrationally exuberant. There seems to be a natural tendency in markets for past successes to lead to more risk-taking, more leverage, more funding, higher prices, more collateral and, in turn, more risk-taking… [S]uch endogenous market processes … can, indeed must, eventually go into reverse if the fundamentals have been overpriced.”

Apart from financial imbalances, the report argues the world economy also displays dangerous misallocations of capital. In its “recent rates of credit expansion, asset price increases and massive investments in heavy industry, the Chinese economy also seems to be demonstrating very similar, disquieting symptoms” to Japan in the 1980s. “In the United States, it is the recent massive investment in housing that has been unwelcome from an external adjustment perspective. Housing is the ultimate non-tradable, non-fungible and long-lived good.” In other words, the U.S. could be stuck with a lot of houses that are hard to sell to each other and impossible to sell to foreigners, and won’t need replacement for a long time.

Wall Street Fears Bear Stearns Is Tip of an Iceberg WSJ ($)

Now, the problems at the Bear Stearns funds — which prompted the firm to lend one of them up to $3.2 billion in a bid to rescue it — show how hedge funds bent on short-term gains can go astray when holding assets that can’t be easily valued. That has stoked worries on Wall Street that other funds with similar types of investments will suffer losses as fund managers reassess the value of those investments. Those concerns contributed to last week’s 279.22-point, or 2.1%, drop in the Dow Jones Industrial Average to 13360.26.

Many hedge funds and other institutions are paid in part on performance, so it is often in their interest to price, or “mark,” their assets aggressively, attaching the highest possible value to them. The higher the value, the more compensation the fund manager receives from the fund’s investors.

Moreover, hedge funds typically don’t keep investors abreast of the details of day-to-day trading. As a result, any losses the funds suffer may be significant by the time investors learn of them. That can be especially true for illiquid assets, which may not show much price movement for months and then dip sharply when confronted with the one-two punch of declining fundamentals and nervous investors.

The combination of illiquidity and leverage has long been a mainstay of financial crises. In 1994, hedge funds run by Askin Capital Management sustained huge losses on leveraged bets on infrequently traded mortgage-backed securities. The collapse of Long-Term Capital Management, which roiled markets around the world in 1998, was sparked by its inability to unwind leveraged bets.

off-the-cuff but accurate portrayal.

Hedge funds obviously don’t want their big investors to withdraw, so they work incredibly hard to make sure they outperform their peers. As the number of funds has grown, so has the difficulty to outperform. There are so many funds chasing the same deals in every area of specialty that the funds keep on investing in riskier and riskier deals. All in hopes of keeping their “money happy”

Bottomline is that hedge funds scramble hard each and every day to make their big investors, some of which can leave on the drop of the hat, happy.

Appeasing hedge fund investors is a very, very different business than making shareholders happy.

If a shareholder sells their share of stock, the hedge fund wont really care. Sure, they want the stock price to go up. They own shares of stock in the fund, and as the stock price goes, so goes some percentage of their networth. That should be enough for them to do whatever it takes to increase the stock price, right ? Maybe

Increasing the price of a share of stock is as much marketing to create demand for the stock as it is earnings of the fund.We also call this increasing the P/E of a stock. There are dozens of ways to increase the PE of a stock that is showing a profit. Hedge fund investors care about 1 thing. Cash. Money that is returned to them. Shareholders care about the price of the stock. One is capital returns, the other is capital appreciation.

That difference is just common sense, but its significant.

more comments

The hedge funds that are staying private have to be licking their chops. Competing against public hedge funds that have to deal with reporting and disclosure requirements is a lot easier than competing with a company that is stealth in their actions. They also know that despite proclamations to the contrary, the public funds will certainly change how they approach investing to make the market happy. The earnings of public funds impact the brand of the fund. If earnings are good, its business as usual. If earnings are bad, and / or the stock underperforms, then the public fund’s brand , and their ability to raise money is diminished.

Finally, the IPO also seems to put public shareholders on the opposite side of the ledger of those that have invested in the fund directly. Shareholders participate with management in the earnings of the fund, while those who put cash into the fund participate in the returns of the investments of the fund. Of course, the higher the return on investments, the greater the income of the fund itself and the numbers allocated to public shareholders. But fund investors returns are also a function of how much or how little management takes off the top. This isnt a problem when things are going great, but its always a problem when things aren’t going great.

This post isn’t expert commentary. Its just a friendly heads up based on what I see.

The Fortress Investment Group became the first American hedge fund and private equity firm to report quarterly earnings Tuesday, and the disclosures highlighted the difficulties the public markets have in dealing with businesses whose income streams are volatile and difficult to predict.

Fortress’ stock fell 4.4 percent to $28.90 a share after it reported $62 million in net income for the first quarter of 2007, a drop from about $130 million in the comparable period last year. The company’s revenue rose 13 percent, to $416.3 million.

The company said its revenue growth was sapped by rising costs, including expenses related to its recent initial public offering.

Just wait until the inevitable *bad* quarter…

From Dealbook

From Andy Kessler

As heard on TV one morning while shaving:

Morning Show Talking Head: So tell us what drives hedge fund managers?

Hedge Fund Dude: It’s just never ending. Thinking about what is going to work next. I have a friend who is worth $150 million who is working some new ideas for a fund.

Talking Head: If I had $150 million, the last thing I would do is start a hedge fund.

Hedge Fund Dude: That’s why you don’t have $150 million.

Fun, content-free, personality piece on Citadel’s founder in Dealbook

From Dealbook

IN 1988, a very young-looking 19-year-old Harvard student sneaked past the receptionist at the Boston office of Merrill Lynch, found the manager in charge of convertible bonds and struck up a conversation about the technical aspects of valuing those bonds.

A few weeks and some discussions later, the student, Kenneth C. Griffin, asked Terrence J. O’Connor, the convertibles expert, to open an institutional trading account with $100,000 he had collected from his grandmother and his dentist, among others. At the time, the size of the average institutional account was $100 million.

“My boss thought I was crazy,” recalled Mr. O’Connor, who nevertheless persuaded his boss to let him open the account.

That gamble doesn’t look so crazy today.

Mr. Griffin is the chief executive of Citadel Investment Group, one of the most powerful and fastest-growing companies in the hedge fund business, with more than $13.5 billion of capital.

There will more of this coming as things turn negative. This is also, in some ways, a response to the heads I win, tails you lose attitude some hedge funds have had towards their LPs.

From Bloomberg

March 30 (Bloomberg) — Amaranth Advisors LLC was sued by the San Diego County retirement fund for securities fraud, a step the hedge-fund firm said may delay refunds to clients hurt when it collapsed under $6.6 billion in losses in September.

Amaranth lied about trading strategies and made “excessively risky and volatile investments,” according to a complaint filed yesterday by the San Diego County Employees Retirement Association. Amaranth said fighting the lawsuit, the first tied to the largest-ever hedge-fund failure, will drain remaining assets earmarked for investors.

…

The San Diego fund accuses Amaranth of defrauding clients by misrepresenting itself as a fund that invested in many different assets, according to the complaint.

“The fund, against its own espoused investment policies, effectively operated as a single-strategy natural-gas fund that took very large and highly leveraged gambles and recklessly failed to apply even basic risk-management techniques and controls,” the complaint says.

From All About Alpha, some great posts on whether hedge fund alpha can be replicated with quantitative, low-cost models:

Below are three sample entries, but All About Alpha has pounded this topic with about 10 entries the last couple of days.

State Street MD on hedge replication model: “I was shocked the explanatory power was so high”

Will hedge funds regress towards index-like products?

Kat: Why Accurately Replicated Hedge Fund Indices Won’t Do You Much Good

Those who know me can take a good guess about whether I believe the 8,000 hedge fund managers who are now in the field are, in meaningful numbers, generating idiosyncratic alpha. And if they are not, then their fee/performance model is all wrong….

No surprise here. 2/20 is hard to beat on broad, sustained basis…

A Limited Supply of Geniuses

In today’s Times, my colleages Jenny Anderson and Landon Thomas Jr. report that hedge funds as a group are underperforming the stock market.

That should be no surprise. Even with the wonders of leverage, outperforming the stock market by enough to overcome the typical hedge fund manager’s compensation of 2 percent of assests and 20 percent of profits ought to be very difficult. As a group, it is very unlikely that a large group of hedge funds could do so on a prolonged basis.

Some — including me — have long feared that hedge fund blow-ups would provoke the next big financial
crisis. Perhaps that will be avoided, but here’s a forcecast:

Within 10 years, and probably less, those who paid the big management fees to hedge funds will be asking themselves, “What were we thinking,” and conventional wisdom will be as scornful of them as it is not of those who jumped into Internet stocks in early 2000.

Source is here