Paper Boat in Stormy Sea

Market Volatility Hits Active Managers Hard

Paper Boat in Stormy Sea

It didn't take long for investors in James Cordier's hedge fund to find out their money had been wiped out by a series of nasty market whipsaws.

Just days after intraday natural gas prices surged by the most in nearly eight years, Bloomberg News reported the veteran options trader used a YouTube video last month to relay the bad news to his high-net worth investors. (See Cordier's taped condolences to his clients below.) 

Describing a recent surge in oil and gas volatility as a "rogue wave," Cordier conceded that big twists and turns in commodities "likely cost me my hedge fund."

Such a grief-stricken concession probably came as little solace for those who'd put their life savings into his trading strategies. According to Bloomberg, at least $150 million in assets were estimated to have been lost after the hedge fund was forced to liquidate.

Unfortunately, these investors weren't the only recent examples of those who've seen their savings lost by an active manager's failure to correctly time short-term bouts of market volatility.

This summer, JPMorgan Asset Management was reported to have informed those invested in a $1 billion hedge fund led by Fahad Roumani that it would close. In September, reports surfaced that Millennium Management shuttered a quant hedge fund that at its height had around $4 billion in assets. Other hedge fund failures catching financial headlines so far in 2018 include Tide Point Capital Management and Sentiment Investment Management.

In 2017, 780-plus hedge funds were liquidated, according to Hedge Fund Research. That followed more than 1,000 hedgies reportedly shuttered a year earlier.

But it's not just hedge fund investors who are realizing the ill-effects of active managers mistiming market fluctuations. The Investment Company Institute is estimating that last year some 592 different mutual funds were either closed or merged away.

The numbers suggest that a vast majority of these failed funds came from the ranks of active management. By the ICI's latest count, 94% of all U.S.-based mutual funds through the third-quarter were using active strategies. It's also worth noting that managers with market-beating mandates have well-documented records of generating returns that trail their comparative indexes. (See our reports on the latest full-year SPIVA benchmarking review and Dimensional Fund Advisors' 2018 Mutual Fund Landscape study.)

If you'd prefer to avoid receiving a message like the one sent out by Cordier, we urge you to plan ahead for your family's financial well-being. As we've repeatedly written in the past, investors with a long-term plan already in-place can patiently let market ebbs and flows work to their advantage over time.

Of course, a critical part of making sure a disciplined financial plan can work properly involves weeding through thousands of different investment choices to select funds with strong track records and well-designed indexes.

Backed by a rigorous research process, a wealth of academic evidence gives IFA's investment committee confidence that sticking to a strategically minded financial plan -- grounded in a globally diverse and passively managed investment portfolio -- provides our clients with their best opportunities to realize higher returns over time, net of fees.

The alternatives just don't paint a very pretty picture.

In the painting above, titled, Whom Should You Trust?, the dilemma of investors is depicted. On one side is the slick salesman of Wall Street products and services. Tugging on the other side is an academic who provides unbiased research that does not require the facade of a polished advertising campaign. The investors are caught in the middle, torn between the forces of salesmanship and empirical evidence. Hopefully, they will listen to the evidence.