Brdigewater returns faltered

Interesting article about Ray Dalio and Bridgewater, the largest hedge fund in the world, looking forward to his new book "Principles", soon to be published.

One snippet:


The transition comes as returns at the hedge fund’s flagship product have faltered, just like at other so-called macro managers. Since the beginning of 2012, Bridgewater’s Pure Alpha II has posted an annualized return of 2.5 percent, according to a document reviewed by Bloomberg Markets, a far cry from its historic average of 12 percent. It’s down 2.8 percent this year through July. (A smaller Bridgewater hedge fund, Pure Alpha Major Markets, has fared better, as has the company’s long-only product.)

Apparently it has not been easy to make money in the last six years, may be of some comfort for investors who have missed out mostly on the bull run of the US stocks:

From Bloomberg: "Here’s How Asia Hedge Funds’ Top Picks at 2015 Sohn Fared".

Hedge funds have highly paid managers based on generous 2/20 management fees, and one would expect that their top picks would in general perform well, but even they can be horribly wrong, as the article shows. Some snippets:

The hedge fund industry has had its worst start to a year, as measured by performance and capital outflows, since 2009, when the world was reeling from the global financial crisis. Asia-focused hedge funds have lost 2.4 percent this year, according to Singapore-based Eurekahedge Pte. Hedge funds’ woes highlight the difficulty of picking investments based on fundamentals in a world kept on its toes by central bank and government intervention.

• The three companies’ shares lost more than 20 percent of their value in the past year .....
• The stock tumbled nearly 34 percent in the one year ....
• Hong Kong shares of Citic Securities Co. and China Galaxy Securities Co., two of the nation’s largest brokers, have lost almost half their value .....
• The broadcasters’ shares all fell, with declines ranging from 4 percent to 20 percent. MMG’s Hong Kong-traded shares plunged 45 percent in the past year ....
• Aoyama’s share price slid 17 percent in the past year.
• Kyocera’s stock has slid 18 percent in the past year

Never follow recommendations of others blindly, best is always to do ones own homework. In the above cases, one can safely assume that the fund managers were already loaded with the stocks that they recommended.

Porsche: The Hedge Fund that Also Made Cars

Amazing story regarding Porsche and Volkswagen, so weird you can't make it up.

As one commenter wrote: "Game of Thrones - German Car Company Edition"

Some snippets:


Volkswagen, from "was widely considered by the financial community to be a pretty crappy company, which is why it was trading at such a low multiple of revenue" to "the most valuable company in the world".

As a result, Volkswagen became one of the most shorted stocks on the market.

This maneuver of secretly buying shares would have been (and still would be) illegal in the United States. In Germany though, where Porsche is based, it was likely legal.

And precisely when Porsche needed banks the most, banks stopped lending money. The words spoken by the company’s CFO years before -- “banks are there for you when you don’t need them, and when you do need them, they’re no where to be seen” -- now seemed prophetic.

The financial markets were baffled by Porsche’s acquisition of Volkswagen shares. Why was a sports car company pouring so much money into a struggling mass-market car company? It seemed to be the equivalent of a company like Hermes announcing it was taking a large stake in Old Navy.

In the blink of an eye, Porsche went from predator to prey. Once on the brink of acquiring Volkswagen, Porsche now found itself borrowing a billion dollars from them just five months later.

“According  to rumour, Ferdinand Piëch likes to run chickens off the road in his Volkswagen Touareg. Whether that is true or not, he certainly tends to ride roughshod over humans, metaphorically at least.”

In 1972, as a married man with five children, Piëch struck up an extra-marital affair with Marlene Porsche -- the wife of his cousin and fellow heir, Gerd Porsche. You can imagine that taking up with your cousin’s wife might make things awkward at Porsche-Piëch family reunions and company board meetings.

So, what is to be learned from the saga of Porsche?

First, if you’re a car company, it’s probably best to focus on making cars instead of gravity-defying financial maneuvers.

Second, capital has a tendency to be there when times are great, but disappears when you need it most.

Finally, if you’re going to go shoot the king, don’t miss.


I wrote before about the hedge fund shorting Volkswagen's shares.

The London Whale and the Washington Super Whale

Be careful what you short, not all is logical in a world of money-printing.

Interesting article by Brad DeLong:


'There is a reason that the trade of shorting the bonds of a sovereign issuer of a global reserve currency in a depressed economy is called "the widowmaker".'

Shareholder activism of fund managers works, also in the long term

The recent increase in hedge-fund activism aimed at producing changes in business strategy or leadership—including at large companies such as Apple, Hess, Procter & Gamble and, as announced last week, Air Products—has met intense opposition from public companies and their advisers. Opponents, such as prominent corporate adviser Martin Lipton, argue that such activism is detrimental to the long-term interests of companies and their shareholders: It may pump up short-term stock prices and benefit the activists—who don't stick around to eat their own cooking—but it harms shareholders in the long term.

This "myopic activism" claim has become the key argument for limiting the rights and involvement of public company shareholders. Furthermore, this claim has been successful in influencing the views of Securities and Exchange Commission officials, Delaware judges, and even institutional investors.

But is the claim true? In a comprehensive empirical study, "The Long-Term Effects of Hedge Fund Activism," completed last month and available on the Social Science Research Network, Duke University's Alon Brav, Columbia University's Wei Jiang and I found that it is not.


The above text is from an article in the "The Wall Street Journal", written by Lucian Bebchuk, one of the authors of  the scientific paper "The Long-Term Effects of Hedge Fund Activism", which can be found here.

The article in The Wall Street Journal continues:


"...we undertook a comprehensive empirical investigation of the long-term consequences of activist interventions. Our study uses a data set consisting of the full universe of approximately 2,000 interventions by activist hedge funds from 1994–2007. We identify for each activist effort the "intervention month" in which the activist initiative was first publicly disclosed, and we follow the company for the subsequent five years.

The evidence indicates that activist interventions tend to target underperforming companies, not well-performing ones. During the three years preceding the intervention month, the operating performance of companies targeted by hedge fund activists significantly trails industry peers, and the companies' stock returns are abnormally negative. This slide tends to reverse following activists' interventions.

During the five-year period following the intervention month, operating performance relative to peers improves consistently. On average, the companies targeted by activists close two-thirds of their gap with peers in terms of return-on-assets and two-fifths of this gap in terms of "Tobin's q," a standard measure of how effectively companies turn book value into shareholder wealth."


Fund managers in Malaysia (especially from government linked funds) have been very passive over the last twenty years or so. I have often lambasted that, for instance here.

The above observation regarding hedge fund managers surely also applies to normal fund managers, not only to hedge fund managers. An article written by James Saft on the Reuters website seems to agree with that, some snippets:


"The data is good enough, and the idea compelling enough, that the technique of holding managements' feet to the fire by investors may turn out to be the great hope of the besieged actively managed investment industry. In other words the take-away may not be for all of us to pile into activist hedge funds but instead to push our existing pension and mutual funds to adopt the same tactics."

"I am uncomfortable recommending investing in activist hedge funds for a variety of reasons. Costs are high and the best ones, like Carl Icahn, probably won't take your money anyway.

But why should shareholder activism have to be the special preserve of hedge funds anyway? It doesn't. California Public Employees' Retirement System (CalPERS) has been doing this for decades, and has pushed for more cooperative pressure with other pension funds."

"Too many actively managed funds are closet indexers with high costs, trying to beat the index by picking stocks. If, as some predict, we are in an extended period of structurally low returns in financial markets, the small gains wrung from shareholder activism will prove all the more valuable.

And remember, a pension or endowment might be able to take a different attitude towards activism, pushing for better treatment of shareholders with a long-term view, rather than seeking to unlock value and move on.

Paying for activist management of company management, as opposed to active fund management which simply votes with its feet by buying and selling, might be a long-term trend with big scope for growth."

Hedge funds going nowhere

A picture paints a thousand words:

Up to the crisis of 2008/9 the story was that hedge funds were trailing but they would do better when markets turn south, their bets were "hedged".

That story turned out to be simply not true.

From The Economist:

The S&P 500 has now outperformed its hedge-fund rival for ten straight years, with the exception of 2008 when both fell sharply. A simple-minded investment portfolio—60% of it in shares and the rest in sovereign bonds—has delivered returns of more than 90% over the past decade, compared with a meagre 17% after fees for hedge funds (see chart). As a group, the supposed sorcerers of the financial world have returned less than inflation. Gallingly, the profits passed on to their investors are almost certainly lower than the fees creamed off by the managers themselves.

And then: "Justifications for poor performance are as diverse as hedge funds themselves."

But numbers don't lie, performance has been too bad and we don't really need to know the justifications. There can only be one explanation, the 2/20 commission simply doesn't work, it is much too much in favour of the managers, to the detriment of the investors.

[2/20 refers to 2% yearly management fees and 20% of the outperformance]

Interestingly, I know some hedge fund managers who have outperformed their niche markets (for instance Asian small and mediumsize cap stocks) by a wide margin, and I don't think that was luck at all. I am pretty convinced they will continue to do so.

But the bad news is that the returns for the other managers will then even be lower.

Also, there has been a lot of news lately about insider trading cases in the US by hedge fund managers. Apparently, the pressure to perform (justifying the 2/20 commissions) might have been too high for some and they resorted to illegal means.

For those seeking exposure to international stocks and bonds, ETF's might be a good alternative.

News October 27, 2011

"AP Land board postpones AGM but still recommends shareholders to sanction asset sale"

http://biz.thestar.com.my/news/story.asp?file=/2011/10/27/business/9774575&sec=business

"In a filing with Bursa Malaysia, AP Land said that its board, (save for interested directors, Low Gee Tat, Low Gee Teong and Low Su Ming) was now of the opinion that the proposed disposal “is not fair but reasonable.” This is a move away from its previous view where the board had stated that the proposal was fair and reasonable.
....
However, the board still feels that the proposal is in the best interest of AP Land and its non-interested shareholders and hence shareholders should vote in favour of the resolution."

Voting in favour of an unfair proposal is in the best interest of the shareholders while there is no hurry at all? The first announcement is from January 2011, more than nine months ago, did the Board of Directors try to come with a better proposal that is more fair? Did it for instance consider holding auctions for its assets?

Olympus’ Kikukawa Quits; Complaint Goes to FBI

http://www.bloomberg.com/news/2011-10-26/olympus-chairman-kikukawa-quits-after-fees-dispute-takayama-is-president.html

"Olympus Corp. Chairman and President Tsuyoshi Kikukawa quit after allegations over acquisitions wiped out more than half the company’s market value in two weeks and as the chief executive officer he fired prepares to meet U.S. criminal investigators."

"Domestic and overseas investors have “expressed opinions that the management of such listed companies have unfairly damaged their corporate value,” the TSE said in the statement on its website. Shareholders were also concerned about “underlying problems in the quality of Japanese corporate governance,” according to the statement."

“They’re stonewalling” Merner said. “They still haven’t answered the question about why they paid huge commissions.”


More Than 80 Percent of Hedge Funds Underwater

http://www.institutionalinvestor.com/Article.aspx?ArticleID=2921936&LS=EMS581643

"The selloff in most of the global markets in the third quarter heavily impacted a large number of hedge funds.

In fact, not only did it put many funds into the red for the year, it pushed a huge number of hedge funds below their high water mark."

Are Hedge Funds not supposed to hedge (part of) the risk? Current conditions (with lots of volatility) should have been good for some funds.

Ray Dalio's radical truth

http://www.institutionalinvestor.com/Popups/PrintArticle.aspx?ArticleID=2775995