What Has Your Equity Hedge Fund Manager Done For You Lately?

by Tyler Durden

Still paying your 2-and-20, despite Stanley Druckenmiller's surprise that you would, for someone to pick stocks for you? Perhaps a glance at the following 3 charts will awaken the animal investing spirits in some (or just a 'fold' from many). This is what happens when there is only one economic market-driving factor (cough Fed cough) and too many coat-tail-clinging hedge fund managers (and newsletter writers) chasing too few real alpha opportunities. The correlation between the S&P 500 and hedge fund returns has never been higher and is approaching 1, excess return (alpha) is near its all-time lows, and, sadly, there is an extremely high correlation between styles and tilts. All your hedge fund alpha are belong to Ben.

Hedge fund managers have become high cost version of their index-tracking ETF brethren...

And performance advantages have dwindled...

as style tilts (growth vs value for instance) have seen increasing correlations...

Removing any and all systemic return generation aside from momentum chasing and dash-for-trash, home-run style investing... So lower excess returns and same risk as market?

From Stanley Druckenmiller...

On whether other managers can say ‘I’m going to take 2 and 20 and not invest:

“I don’t know. The way I always approach a business is, you give me a pile of money and I’m going to try and pound the money for you overtime as best I can. This whole quarterly performance and risk-adjusted stuff invading the hedge fund, I don’t get it. I can’t imagine why anybody would pay two and 20 to what is out there. When I started in the business, there was me, George Soros, Paul Tudor Jones, Bruce Kovner. We were expected to make 20-percent a year in down markets. There was none of this ‘Oh, I’ve got a risk-adjusted return of 8. That is how to two plus 20 came about.

On why Hedge Fund managers are less successful:

“There are too many, there were eight to ten back then. Somehow, 9000 people are pricing their product off of eight to ten people historic performance. I noticed a lot of the smart early investors and hedge fund clients were leaving, but they were more than replaced by state pension funds, sovereign wealth funds and so far they have been perfectly happy to get returns that our early investors would have never tolerated.”

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