Pragmatic Capitalism

Practical Views on Money & Finance


By Walter Kurtz, Sober Look

As discussed last month, the hedge fund industry continues to experience outflows. Net withdrawals that started in December 2011 continued through the first quarter of this year.

Given the increase in risk aversion since March, redemptions are likely to have accelerated recently. In particular Global Macro hedge funds are once again among the funds group that is struggling.

Throughout the second half of 2011, Europe became the bane of macro funds’ existence, as managers got constantly whipsawed by the whims of Eurozone politicians and bureaucrats. Investing based on relative value became irrelevant. Market trends (in currencies, commodities, rates, equities, etc.) kept reversing direction (sometimes several times a month), often rendering fundamental economic analysis completely useless.

Fund flows ($MM) by strategy

These funds continue to struggle with the same issues today, unable to recover even a third of their 2011 losses (see chart below). It looks increasingly unlikely that they will recover full losses (“high watermark”) before the end of this year, which means most will not qualify to collect incentive fees in 2012. Even Brevan Howard’s flagship fund which beat most of its competitors by returning 12% in 2011 is down year to date. Given its strong track record, Brevan Howard is going to be just fine, but its Global Macro competitors are likely to see further investor redemptions.

Global Macro hedge funds performance (source: DJ/CS Hedge Funds Index, 1/1/2011 = 100)
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Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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