Friday, April 22, 2011

Hedge fund industry resumes attracting billions, however for what?

Hedge funds appear to be looked at favorably yet again. In search of high returns, investors are turning yet again to hedge funds and their risky approaches. However there are more losers than winners overall in the hedge fund industry and several funds will most likely tip over before the year is out.

Hedge funds treading water

The hedge fund industry attracted $22 billion from investors in March, the highest rate in over a year, according to The 2008 all-time high is almost being hit with the hedge fund business at $2.5 trillion. This is 83 percent of that high number. A few hedge funds are doing really well. The rest of them are nevertheless struggling to make money though. In fact, states that about 35 percent of 2,500 funds that voluntarily report performance have yet to return to their high water marks. While investors are seeing returns, the hedge funds themselves cannot charge performance fees until the assets they manage return to their pre-financial crisis peak. In order to get to the right place, a hedge fund with $100 million that lost 25 percent during the meltdown has to get a 35 percent return at the very least. There might be years before the fund can go back to normal. That normal 20 percent could be hard to get.

The manipulation in the hedge funds

The management fees of about 2 percent of the assets are charged while client expenditures are also charged which is the way hedge funds are able to get money up. Others who lost most of their client’s money simply shut down, reopen under a different name, entice new investors and start collecting performance fees. Then it is business as usual, which contains classic forms of hedge fund industry manipulation. For hedge funds that have returned to performance fee territory, most of them inflate reported returns by purchasing up their own holdings the last few seconds before a quarter concludes. After their fabricated results are recorded, they dump the stock. A study was done on this to show it is true. Toulouse School of Economics, Wharton, Ohio State and Swiss Finance Institute were all a part of this. The last-second rallies are good for stocks with a lot of hedge fund ownership. This was shown in the research to benefit more than normal. After the manipulation,! stocks with high hedge fund ownership also trended toward lower returns on the first day of the month.

Huge increases for hedge funds

Business experts believe that in 2011, a hedge fund shake out will happen making it so some of them disappear while many are attempting to make a recovery. This isn’t new. It occurs often. According to, the median return of 1,400 hedge funds tracked over the past five years is 41 percent. Several hedge funds lost then. There were 3,000 totally dropped. According to Brett Arends at MarketWatch, the great numbers reported by the hedge fund industry only include a few of the survivors. His own “vanilla portfolio” was in contrast to 2,229 hedge funds. All of these started in 2001. The vanilla portfolio gained 94 percent. If the industry were to match the vanilla portfolio, it would need all the hedge funds that did not do better. They would have all needed to get 60 percent. This didn’t happen. A fifth of the 535 survivors didn’t come close to matching this.

Articles cited

Market Watch

New York Times

All About Alpha

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