Another towering figure in the financial industry is warning major pension systems to beware of investing retiree money in hedge funds. During a Thursday meeting at the World Economic Forum, billionaire investor George Soros cited management fees charged by hedge funds in arguing that steering billions of dollars of public employees‘ money into such products is imprudent.When Soros talks about hedge funds, I listen, but when he rails against the "evil" Putin and Russia, I tune off because it's all U.S. propaganda that professor Stephen Cohen has thoroughly discredited.
“Current market conditions are difficult for hedge funds,” said Soros, who recently retired from his currency focused hedge fund business. “Their performance tends to be equal to the average plus or minus a 20 percent management fee.” He said that while “you will always have some hedge funds that will provide outside performance ... to put a large portfolio into a hedge funds is not a winning strategy.”
Public pension systems currently have roughly $470 billion worth of investments in hedge funds, according to data compiled by Prequin, a financial research firm.
Soros made his comments only months after Warren Buffett issued a similar warning. A few months after Buffett’s comments, the United States’ largest pension system, the $296 billion CalPERS, or California Public Employees' Retirement System, made national headlines when in September it ended most of its hedge fund investments.
CalPERS’ move has been seen as a potential trend setter. In October, the $20 billion San Francisco pension system tabled a proposal to invest in hedge funds, and in December, New York Gov. Andrew Cuomo, a Democrat, vetoed legislation to increase the amount his state can invest in such high-risk vehicles.
The shift out of hedge funds has now moved to Europe. Earlier this month, the $184 billion Netherlands public pension system dumped its hedge fund investments. A top official told Reuters at the time: "With hedge funds, you're certain of the high costs, but uncertain about the return.”
In other remarks at the World Economic Forum, Soros urged world leaders to more forcefully intervene to challenge Vladimir Putin’s regime.
“Russia has become a mafia state in which the rulers use the resources of the country to enrich themselves and to maintain themselves in power,” he said. “They preserve the outward appearances of democracy such as holding elections, but there is no rule of law and no arrangements for a legitimate transfer of power.”
Of Russia’s standoff with Ukraine, he said: “Ukraine should be able to defend itself militarily as long as Putin maintains the pretense that the separatists are acting on their own, but it urgently needs financial assistance. I believe Europe will respond favorably... Much depends on the next few days. Not only the future of Ukraine but also the future of the European Union itself is at stake. I believe the loss of Ukraine would be an enormous loss for Europe. It would allow Russia to divide and dominate.”
Don't get me wrong, I know Putin is no angel and that Russia is a hopeless mafia state, but there are plenty of mafiosos in Washington with their own hidden agenda to destroy Russia and Putin's ambition to break the U.S. banking cartel. You should all listen to Michael Hudson's discuss the Russian Pivot to gain deeper insights into the tensions between the U.S. and Russia.
Of course, Russia's fortunes are inexorably tied to the price of oil, and when Gary Cohen, president of Goldman Sachs and a former oil trader, goes on CNBC to state that they believe oil prices will probably continue to decline and could reach as low as $30 a barrel in an extended slump, you know the banking cartel is winning the real (economic not political) war on Russia.
Getting back to Soros's comments on hedge funds, he has nothing to lose because his money is being run by his family office. He pretty much states the obvious, namely, the bulk of hedge funds stink and are charging hefty alpha fees for sub-beta performance.
Moreover, Soros is right, there will always be some hedge funds that deliver outsized performance, but current market conditions are very difficult for most hedge funds and picking winners is becoming increasingly more difficult. This is one reason why CalPERS dropped a bomb back in September and why the giant Dutch healthcare pension, Pensioenfonds Zorg en Welzijn (PFZW), dealt another blow to the industry recently and also exited hedge funds (CIO magazine reports that PFZW netted a $56 million profit in two months as it exited hedge funds last year).
Just how difficult are market conditions for hedge funds? Extremely difficult. Just look at how the Swiss currency tsunami hit macro funds hard, obliterating many of them. In fact, hedge fund manager Marko Dimitrijevic closed his largest hedge fund, Everest Capital's Global Fund, after losing almost all its money after the Swiss National Bank (SNB) scrapped its three-year-old cap on the franc against the euro.
Bloomberg reports that the franc fallout spread to other well-known macro hedge funds:
Billionaire Michael Platt’s BlueCrest Capital Management lost money in one of its funds and at least two employees departed as the fallout from last week’s sudden jump in the Swiss franc spread across the hedge-fund industry.
Platt lost 5.5 percent in his macroeconomic fund through Jan. 16, two people with knowledge of the matter said. Comac Capital, Fortress Investment Group LLC (FIG) and Everest Capital also reported declines.
Among managers avoiding losses are Leda Braga, a former BlueCrest executive who started her own computer-driven trading firm this month, and who gained 7 percent in January through last week. Billionaire Alan Howard posted gains in his main fund at Brevan Howard Asset Management.
The market turmoil caused by the Swiss National Bank’s surprise decision on Jan. 15 to remove a three-year-old cap on its currency pushed some currency-trading firms into insolvency and caused losses worth hundreds of millions of dollars at banks and hedge funds. The franc soared as much as 41 percent against the euro that day.
Speculators boosted wagers that the franc would weaken against the dollar to the highest in 1 1/2 years this month, Commodity Futures Trading Commission data show, only to be hurt by the currency’s jump.
Platt’s Woes
At BlueCrest, the declines are a further setback for former JPMorgan Chase & Co. trader Platt, 46, who started the firm in 2000. BlueCrest has faced underperformance, a decline in assets as clients pulled money and concern that an internal fund run for select employees may pose conflicts of interest between BlueCrest and its clients.
Amid last week’s losses, Luke Halestrap and Peter McGarry left the $15 billion Jersey-based firm, said the people, who asked not to be named because the information is private. BlueCrest shut a portfolio run by currency money manager, Peter Von Maydell, a person with knowledge of the decision, said yesterday.
Halestrap and McGarry didn’t reply to e-mails and telephone messages seeking comment. Before BlueCrest, Halestrap was at Merrill Lynch & Co., where he oversaw European trading in basic interest-rate related products. McGarry had previously worked at 5:15 Capital Management and BNP Paribas SA.
Braga’s Gain
Braga, the 48-year-old Brazilian who ran quantitative trading at BlueCrest, said in September that she was planning to start her own firm, Systematica. She planned to take almost a third of BlueCrest’s assets, with Platt’s firm taking a minority stake.
Her $5.6 billion BlueTrend fund posted a 3 percent gain last week, according to an investor update from her Geneva-based firm. Systematica oversees $7.7 billion in total in the strategy, which uses computer models to decide when to buy or sell stocks, bonds, currencies and commodities.
Another Geneva-based hedge fund manager, billionaire Howard, 51, avoided losses in his largest hedge fund, according to a person familiar with the matter. Howard’s Brevan Howard Master Fund gained 1.9 percent in the month through Jan. 16, compared with 1.1 percent as of Jan. 9, the person said.
Chris Rokos, who co-founded Brevan Howard with Howard and three other traders in 2002, said today that he will start his own hedge fund with the backing of his former employer after settling a lawsuit against the firm. Rokos had generated more than $4 billion when he worked at Brevan Howard.
Fortress’s LossI've already discussed Leda Braga, the most powerful women in hedge funds, when I went over PFZW's decision to exit hedge funds.
In New York, Todd Edgar’s Atreaus Capital rose 10 percent last week as the $800 million currency and commodities hedge fund speculated that the euro would tumble, said another person. Atreaus, backed with $150 million from Goldman Sachs Group Inc.’s asset management arm in 2012, rose 9 percent last year, helped by wagers that the dollar would rise.
Other firms were less prescient. Fortress’s macro fund lost 7.9 percent this month through Jan. 16, according to an investor. The shares of the New York-based firm fell 4.4 percent today on the news, the biggest decline in four months.
Comac Capital, the $1.2 billion firm run by Colm O’Shea in London, is returning money to clients after losses. Everest Capital, run by Marko Dimitrijevic in Miami, saw all the money in its $830 million Everest Capital Global fund wiped out, leaving the firm with $2.2 billion in its other funds.
Officials for the hedge funds declined to comment.
Zero Hedge, in its infinite wisdom, questioned how Soros and Alan Howard managed to avoid getting crushed by the surprise move from the Swiss National Bank but the truth is they were among a few savvy investors who were able to avoid steep losses.
This brings me to a very important point and I want all of you to pay attention here. I've invested with the very best global macro funds in the world, went head to head with the great Ray Dalio and others on why deflation is the ultimate endgame and I've never heard so many lame excuses by macro fund managers explaining their terrible calls on rates and currencies.
I'm amazed at the lame and ridiculous excuses coming out of many hedge fund managers for their poor performance. They blame the Fed and other central banks for 'juicing up' markets and removing volatility and when volatility comes back in a big way, they are confounded, like deers caught in headlights.
In fact, part of me really misses grilling the hell out of these overpaid gurus but to be honest, I've danced enough with these hedge fund prima donnas and would rather write my own views. A bright up and coming hedge fund manager told me yesterday how I got the call on deflation and rates right and I stick with my Outlook 2015 even with all the nonsense and fear following the Greek political earthquake.
Also, while the mighty greenback will hit earnings of many large corporations and exacerbate global deflation which most investors are not prepared for, I'm still betting on a melt-up in stocks led by technology (XLK) and especially biotech (XBI). My personal account was up huge last year and even though it was insanely volatile, I got my positions right because I got the macro calls right.
On that note, I ask all of you benefiting directly or indirectly from my insights to please show your appreciation and donate or subscribe to my blog via PayPal on the top right-hand side under my bio and contact info. I appreciate your words of encouragement but prefer your financial support (I'd be embarrassed if you haven't contributed, especially those of you who put me in this situation).
Below, Agecroft Partners' Don Steinbrugge and Bloomberg View columnist Barry Ritholtz discuss whether market volatility is good for hedge funds with Bloomberg's Trish Regan on "Street Smart."
Please keep in mind my comments and Soros's warning when investing in hedge funds. I honestly believe most pensions are better off following CalPERS and PFZW, exiting from hedge funds altogether.