Do Hedge Funds Really Need Viagra?

Blue pills

 

The cover of the most recent Bloomberg BusinessWeek magazine is already creating controversy, which is sure to build; perhaps the point. Its obvious phallic nature, with the title “The Hedge Fund Myth,” will create squeamishness among media critics and praise from those folks who tend to like that sort of pushing of the envelope. But what I find interesting is the target and how the target group, hedge funds, is probably what gave the editors the confidence to be this bold.

It is not appropriate to target certain groups for criticism and that list has grown over the years but many people like to take their digs and rich hedge fund managers are an easy target. And to do it in such a sexual manner is an interesting decision.

What is being communicated is that these guys are not the studs producing strong returns many folks believe them to be but weak (limp) pretenders. Are they right or this just another case of the traditional business media protecting the traditional investment world?

I would vote on the latter as the headlines themselves are so incendiary that they tend to be comical — again much more to do with the target than the facts. The issue includes these headlines for example: “Hedge Funds are for Suckers,” and “Hedge Fund Hijinks To Continue After SEC Move.”

IF UNDERPERFORMANCE PERSISTS FOR 4 YEARS CALL YOUR BROKER
Obviously it will take more time and research to provide a quantitative rebuttal to Bloomberg’s ah er thrust, but let’s start with a few simple facts. Hedge funds generally are absolute return alternative investment vehicles created to earn returns above the risk free rate or “alpha” when traditional investments struggle, so it doesn’t make too much sense to compare them to traditional assets in a bull market and criticize them for underperformance. Bloomberg BusinessWeek would be the first to defend the performance of long equity mutual funds in a bear market. The point being there will be both bull and bear markets and investors should have the ability to diversify so they are not wiped out in years like 2008.

Inclusion of alternatives in a portfolio tends to improve returns and, more importantly, reduce overall volatility. Anyone can pick better or worse strategies over certain periods of time but it is always beneficial to have non-correlated investments that tend to smooth your overall portfolio.

The general business media usually includes managed futures in the broad umbrella of hedge funds but I don’t recall the following headline in any mainstream business publications: “Managed Futures the only asset class to earn strong returns in 2008.”

But it was. And, quite comically, there was a study put out by the Yale International Center of Finance in October 2008 titled:  “Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors.” (See study below).

It was comical because of the timing as the stock market crashed in 2008 and even most equity based hedge funds and diversified fund of funds tanked but CTAs had a tremendous year and this study came out in the midst of it saying that Managed Futures was a terrible investment choice and basically that the people who invested in it were simply too stupid to know better. Yet CTAs produced outsized performance in 2008 on an absolute return basis as well as against all other investment vehicles.

Adding to that comedic value of this dubious study is that one of the authors, Geetesh Bhardwaj, hailed from AIG Financial Products, the arm of the insurance giant that had to be bailed out in the fall of 2008 and had a significant role in the credit crisis through its trading of credit default swaps.

However, Bloomberg BusinessWeek did seem to be focusing on what we would generally consider hedge funds though they tend to include CTAs in this group when it suits their purposes.

For now let’s focus a little on lifting the advertising ban. First off the author of this commentary seems to be confused in putting this in the lap of the Securities and Exchange Commission (SEC). While I usually never skip a chance to criticize the SEC, lifting the ban on general solicitations by private placements was part of the JOBS Act passed by Congress and signed by the President last summer. The SEC simply had to write rules for it but the author, John Wasik, doesn’t seem to understand this referring to it as “The SEC’s blunder.”

4 Responses to “Do Hedge Funds Really Need Viagra?”

  1. JB

    Geetesh Bhardwaj, really ? talk about sticking his foot in his mouth, hell, his whole frickin leg

    Reply
    • Dan Collins

      Thanks JB,

      I recall writing about this at the time and thinking it would cause a firestorm but it quickly faded away. The real tragedy in this poorly constructed and biased study is that most folks, even some pretty knowledgeable people, will see the Yale name and automatically believe the contents.

      Reply
  2. Michael Ottjepka

    Dan you’ve hit the nail on the head.

    Business Weak appeals to the masses
    (sex sells especially to male eyeballs) and the advertisers that exploit them.

    Alternative investments and technologies are disruptive.

    There is a vested interest in maintaining the status quo.

    These ‘don’t consider alternatives’ hit pieces remind me of the tactics used by William Randolph Hearst to undermine the non-medicinal hemp industry to protect his investments in timber.

    What I find especially interesting is that the 1% doesn’t lawfully permit the rest of us to participate in sophisticated investments.

    Lifting the ban on hedge fund advertising is a feel good red herring that affects no one.

    Sophisticated investors know how to find and vet alternatives or have advisors that do.

    Non-sophisticated investors, by law, can’t be advertised to
    nor are they allowed participation so there will be no mass market to advertise to.

    As the cancer of crony capitalism always ends badly my wishing for a truly laissez faire economy is as likely to happen in my lifetime as your wishing for a level playing field and a change in human nature to become an actuality in yours.

    Carpe Nunc.

    Reply
    • Dan Collins

      Thanks Michael,

      You bring up several good points. I have long argued that alternatives in general and managed futures specifically are not only appropriate to retail investors but more appropriate than long-only equity strategies. The only question should be the appropriate regulatory structure. Why should only the elites have access to products that can produce strong returns in bear equity markets? I always thought of it as just the top managers wanting to avoid regulations, never considered elites want to hoard access to absolute return vehicles. Interesting angle.

      Reply

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