The long and short on hedge funds is that long and short isn’t working so well anymore.
That’s the rather simple strategy that built the $3.2 trillion industry - the once-durable buying long when you figure an equity will go up and selling short when you reckon the opposite - and that basically put the “hedge” in hedge fund. These days it’s unreliable, at best.
The techniques of the future? Think niche, like litigation finance or private debt and equity, from Deere & Company tractor dealerships to a banana plantation in Costa Rica.
There are any number of reasons trotted out for long-short’s fallibility: little volatility, low interest rates, so much passive investing in stocks by the likes of Vanguard Group and BlackRock, too many quantitative funds in the business. What’s more, the number of publicly traded companies in the United States is, at about 3,700, half what it was in 1996.
The explanations aren’t just excuses. Low rates mean funds earn nothing on the cash produced when they sell a stock short. Passive investing and quants tend to push troubled companies higher.
“The one strategy that is facing an existential question is long-short equity,” Ted Seides, former head of hedge fund investor Protégé Partners, said recently at an investor conference at the University of Virginia’s Darden School of Business in Charlottesville.
Most everyone agrees the question will remain, at least until the almost nine-year bull market comes crashing down. Only then will it be clear whether stock hedge-fund managers can protect capital, or even make money.
Sure, some have continued to profit - Coatue Management and Light Street Capital Management, to name two - but they’ve managed to do so by betting on technology companies and limiting wagers of any kind on shares they expect to tumble.
The disillusionment with stock hedge funds comes as an increasing number of institutions have grown disenchanted with the industry’s returns overall, creating the worst climate for raising money since the financial crisis. Last year, investors pulled a net $106 billion as the private partnerships trailed global stocks, according to data compiled by eVestment.
Hedge-fund assets are up just 4 per cent so far this year. The number of start-ups - 369 in the first nine months of the year, according to Hedge Fund Research - is the lowest since 2000, when the big internet bubble burst.
Cheap, esoteric and private investments may end up carrying the industry if recent activity is any indication: The biggest inflows this year have gone to long-biased or long-only products run by the quantitative funds, which use computers to decide what to buy and charge lower fees than most.
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Renaissance Technologies, for instance, has pulled in $10bn so far this year, while assets at Two Sigma have risen to $50bn, up from $38bn a year ago.
At Luxon Financial, investors have asked for products that can wager on rising and falling prices of securities but that charge much lower fees than hedge funds, said president Anson Beard, whose last job was an executive at a stock hedge fund that closed. Luxon's Cary Street Partners is a $2.5bn firm of about 40 registered investment advisers whose clients are high-net-worth individuals in the Southeast US and Texas.
Mr Beard said he sees these so-called liquid alternatives taking the place of hedge funds in many investors’ portfolios.
Longford Capital Management raised $500 million for what’s known as a litigation finance fund: it focuses on financing corporate lawsuits and taking a piece of settlements or judgments.
Capstone Investment Advisors, which buys and sells the volatility of stocks, bonds and currencies, has seen assets grow by about $2.5bn this year on performance and inflows and now manages $5.6bn.
Family offices, which once seeded hedge funds, are also looking to private deals, whether it’s a swimming pool equipment company or an outfit working on nuclear-fusion technology. John Paulson, who has seen many clients jump ship from his hedge fund after years of poor returns, is trying to lure them back with those that invest in private equity and debt investments.
Even veterans have been getting trounced. Take Lee Ainslie, who started Maverick Capital in 1993 after he left Tiger Management, where he trained with famed investor Julian Robertson. He lost about 10 per cent last year and is down again this year. John Burbank's Passport Global Strategy Fund, which started in 2000, has also posted back-to-back losses.
Traditional stock hedge-fund managers remain hopeful. Mr Ainslie told investors that he expects short selling to again be a profitable pursuit.
“On the short side, periods of frustration are not uncommon and are typically followed by periods in which short selling is actually quite rewarding,” Mr Ainslie wrote in a letter this summer.
As long as the benign investment environment continues, with passive investing on the rise and the economy still growing, it pays to look in less travelled corners, says Marc Lasry, who runs the $9.8 bn Avenue Capital. “Right now, what the investing world offers you is niches.”
Brad Alford, who runs Alpha Capital Management in Atlanta, helps institutions find investment consultants, and the poor performance of hedge funds has created a boon for him. "I'm working with several large institutions who want to change their consultants because they are very unhappy that so much of their money has been directed to hedge funds," he says. "Now they want to double down on private equity and private debt."
ICC Awards for 2021
MEN
Cricketer of the Year – Shaheen Afridi (Pakistan)
T20 Cricketer of the Year – Mohammad Rizwan (Pakistan)
ODI Cricketer of the Year – Babar Azam (Pakistan)
Test Cricketer of the Year – Joe Root (England)
WOMEN
Cricketer of the Year – Smriti Mandhana (India)
ODI Cricketer of the Year – Lizelle Lee (South Africa)
T20 Cricketer of the Year – Tammy Beaumont (England)
The smuggler
Eldarir had arrived at JFK in January 2020 with three suitcases, containing goods he valued at $300, when he was directed to a search area.
Officers found 41 gold artefacts among the bags, including amulets from a funerary set which prepared the deceased for the afterlife.
Also found was a cartouche of a Ptolemaic king on a relief that was originally part of a royal building or temple.
The largest single group of items found in Eldarir’s cases were 400 shabtis, or figurines.
Khouli conviction
Khouli smuggled items into the US by making false declarations to customs about the country of origin and value of the items.
According to Immigration and Customs Enforcement, he provided “false provenances which stated that [two] Egyptian antiquities were part of a collection assembled by Khouli's father in Israel in the 1960s” when in fact “Khouli acquired the Egyptian antiquities from other dealers”.
He was sentenced to one year of probation, six months of home confinement and 200 hours of community service in 2012 after admitting buying and smuggling Egyptian antiquities, including coffins, funerary boats and limestone figures.
For sale
A number of other items said to come from the collection of Ezeldeen Taha Eldarir are currently or recently for sale.
Their provenance is described in near identical terms as the British Museum shabti: bought from Salahaddin Sirmali, "authenticated and appraised" by Hossen Rashed, then imported to the US in 1948.
- An Egyptian Mummy mask dating from 700BC-30BC, is on offer for £11,807 ($15,275) online by a seller in Mexico
- A coffin lid dating back to 664BC-332BC was offered for sale by a Colorado-based art dealer, with a starting price of $65,000
- A shabti that was on sale through a Chicago-based coin dealer, dating from 1567BC-1085BC, is up for $1,950
Dates for the diary
To mark Bodytree’s 10th anniversary, the coming season will be filled with celebratory activities:
- September 21 Anyone interested in becoming a certified yoga instructor can sign up for a 250-hour course in Yoga Teacher Training with Jacquelene Sadek. It begins on September 21 and will take place over the course of six weekends.
- October 18 to 21 International yoga instructor, Yogi Nora, will be visiting Bodytree and offering classes.
- October 26 to November 4 International pilates instructor Courtney Miller will be on hand at the studio, offering classes.
- November 9 Bodytree is hosting a party to celebrate turning 10, and everyone is invited. Expect a day full of free classes on the grounds of the studio.
- December 11 Yogeswari, an advanced certified Jivamukti teacher, will be visiting the studio.
- February 2, 2018 Bodytree will host its 4th annual yoga market.
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At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
Company profile
Name: Dukkantek
Started: January 2021
Founders: Sanad Yaghi, Ali Al Sayegh and Shadi Joulani
Based: UAE
Number of employees: 140
Sector: B2B Vertical SaaS(software as a service)
Investment: $5.2 million
Funding stage: Seed round
Investors: Global Founders Capital, Colle Capital Partners, Wamda Capital, Plug and Play, Comma Capital, Nowais Capital, Annex Investments and AMK Investment Office
Expert advice
“Join in with a group like Cycle Safe Dubai or TrainYAS, where you’ll meet like-minded people and always have support on hand.”
Stewart Howison, co-founder of Cycle Safe Dubai and owner of Revolution Cycles
“When you sweat a lot, you lose a lot of salt and other electrolytes from your body. If your electrolytes drop enough, you will be at risk of cramping. To prevent salt deficiency, simply add an electrolyte mix to your water.”
Cornelia Gloor, head of RAK Hospital’s Rehabilitation and Physiotherapy Centre
“Don’t make the mistake of thinking you can ride as fast or as far during the summer as you do in cooler weather. The heat will make you expend more energy to maintain a speed that might normally be comfortable, so pace yourself when riding during the hotter parts of the day.”
Chandrashekar Nandi, physiotherapist at Burjeel Hospital in Dubai
How to watch Ireland v Pakistan in UAE
When: The one-off Test starts on Friday, May 11
What time: Each day’s play is scheduled to start at 2pm UAE time.
TV: The match will be broadcast on OSN Sports Cricket HD. Subscribers to the channel can also stream the action live on OSN Play.
Skewed figures
In the village of Mevagissey in southwest England the housing stock has doubled in the last century while the number of residents is half the historic high. The village's Neighbourhood Development Plan states that 26% of homes are holiday retreats. Prices are high, averaging around £300,000, £50,000 more than the Cornish average of £250,000. The local average wage is £15,458.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
The specs
Engine: Four electric motors, one at each wheel
Power: 579hp
Torque: 859Nm
Transmission: Single-speed automatic
Price: From Dh825,900
On sale: Now
Global institutions: BlackRock and KKR
US-based BlackRock is the world's largest asset manager, with $5.98 trillion of assets under management as of the end of last year. The New York firm run by Larry Fink provides investment management services to institutional clients and retail investors including governments, sovereign wealth funds, corporations, banks and charitable foundations around the world, through a variety of investment vehicles.
KKR & Co, or Kohlberg Kravis Roberts, is a global private equity and investment firm with around $195 billion of assets as of the end of last year. The New York-based firm, founded by Henry Kravis and George Roberts, invests in multiple alternative asset classes through direct or fund-to-fund investments with a particular focus on infrastructure, technology, healthcare, real estate and energy.
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