Shark Tank

More Troubled Waters for Hedge Funds

Shark Tank

A few months ago, we published this article about the difficulties faced by hedge funds and alternative strategy mutual funds in delivering acceptable returns to their shareholders. Since that time, the situation appears to have worsened for hedge funds, according to this article in the Wall Street Journal. This bad news comes on the heels of the announcement by the California Public Employees’ Retirement System (CalPERS) that it would eliminate its hedge fund program. Since CalPERS is widely considered to be a trendsetter in this space, other pension funds have indicated that they may follow suit.

The WSJ article states that top firms including Jana Partners LLC, Discovery Capital Management LLC and Paulson & Co. have posted losses ranging from 5% to 11% for the month. It quotes Brad Alford of Alpha Capital Management who said, “It’s a bloodbath out there—there are some awful numbers.” As if this wasn’t hyperbolic enough, we have this gem from Paul Westhead of Rimrock Capital Management LLC who told his investors in a letter that that recent market activity reminded him of a scene from the “Jaws” movies: “An idyllic investment environment amid an improving economy…and the cue the music…dun-dun…dun-dun…dun-dun.” Many of these hedge funds appear to have chummed their own water by speculating on mergers and energy prices.

John Paulson’s Advantage Fund was down nearly 11% for October through the 14th, bringing its year-to-date losses to 22%, compared to 3.5% for the S&P 500 Index. It seems that Mr. Paulson had placed a large bet on the acquisition of Shire by AbbVie. Unfortunately, regulatory changes prompted the deal to be terminated, so Shire lost 30% of its value. You may recall that Paulson made his bones in the 2007-2008 mortgage meltdown by being one of the few investors to bet against them at the right time. His exploits are documented in Gregory Zuckerman’s The Greatest Trade Ever. Of course, a success of that magnitude is difficult (if not impossible) to replicate. Nevertheless, Mr. Paulson has leveraged his success to become the third wealthiest hedge fund manager in the world at $13.7 billion, according to this Forbes list of billionaires.

The $15 billion Discovery Capital Management fund was down about 10% over the same period, taking a hard hit from the recent drop in oil prices which has prompted one fund, Hall Commodities LLP, to call it quits, according to this Bloomberg article. We at Index Fund Advisors think that hedge fund investors should follow the example of CalPERS and call it quits as well. We have seen too many examples of hedge funds taking on risks or committing frauds that their investors failed to understand until it was too late. In the spirit of Mr. Westhead’s statement above, don’t be sharkbait!