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Barry Ritholtz Explains Why Hedge Funds Have Had Lousy Performance (Bloomberg)
The hedge fund industry looks set to have its worst annual performance since 2005, writes Barry Ritholtz in a Bloomberg column. In 2013, through November, hedge funds have returned 7.1%, compared with 29.1% for the S&P 500 index. There are five key reasons hedge funds underperform, according to Ritholtz.
1. Industry size – The hedge fund industry has ballooned and “there is just not enough All-Star quality talent to go around.” Also, “there are not enough market inefficiencies to be identified and exploited,” since the industry grew. 2. Fund size – “Increased assets under management typically leads to weaker performance.” 3. Hedge funds are unhedged – “They are perhaps better described as highly leveraged active trading vehicles.” 4. High fees – “Studies of mutual funds have shown that even when all other things are not equal, investors are better off with the cheaper fee fund. High fees compounded over time degrade performance as well.” 5. There isn’t a normal distribution of Alpha – The data distributions aren’t along a smooth bell curve, instead, “a handful of large outliers typically trounce the rest of the industry numbers.”
Phoenix Marketing International asked 1,318 advisors for the brand of funds they would recommend over the next six months. Registered Investment Advisors (RIAs), picked Vanguard, while broker-dealer reps named American Funds their top picks, reports Michael S. Fischer and the ThinkAdvisor staff.
RIAs rounded off their top five with iShares, PIMCO, PowerShares, and BlackRock. In comparison, independent broker-dealers picked Franklin Templeton, BlackRock, PIMCO, and iShares to round off their top five. Some think the survey results reflect the fee structure for each advisor affiliation.
There weren’t too many asset allocation opportunities for policy divergence in 2013, even if that theme got a lot of attention, writes Barclays’ Jim McCormick and his team. “We see a reasonably strong case for policy divergence to play a more important role in asset allocation in 2014,” McCormnick writes.
“Over the course of the next year, we expect the Fed fully to withdraw from QE and markets to bring forward expectations for a first Fed rate hike to mid-2015. Markets appear broadly acclimated to this outlook as well. Against this, we expect further easing by the ECB via a VLTRO, with the possibility of another rate cut if inflation falls further. In Japan, we expect the BOJ to extend its QQE policy to the end of 2015, bringing its balance sheet to 70% of GDP, with risks tilted toward even more aggressive policy easing.”
With that in mind McCormick recommends being underweight US core fixed income, against core Europe. The dollar should strengthen against the yen and the euro, but a significant recovery probably won’t materialise till later in the year. McCromick also favours stock markets outside the U.S. “The macro and valuation picture looks better for other equity markets, especially in Europe, EM and possibly Japan.”
Short bets against the stock market have increased since the Fed began considering tapering its $US85 billion monthly asset purchase program in May. Flows into long-term investment funds stopped and cash began to accumulate in money market funds.
“Many equity investors are worried given the 27% rally YTD, but we estimate that an incremental $US169 billion in pent-up cash and short interest due to taper fears is likely to make its way into equities in the next 3-4 months,” writes Deutsche Bank strategist Keith Parker in a note to clients. “Indeed, the [first-half-of-the-year] pattern since 2009 has seen cash move out of money markets and into bonds and equities.”
Here Are Blackrock’s Key Themes For 2014 (BlackRock)
BlackRock has identified 10 key themes for 2014. 1. Interest rates will tick higher but not go through the rood. 2. Inflation is expect to remain low for the next year and the risk is to the downside. 3. The economy will grow, but slowly. 4. There is job growth, but wages aren’t growing. 5. More policy uncertainty will mean more volatility.
In light of this they say investors should do five things. 1. Stick with stocks “for now.” 2. Find growth opportunities outside of the U.S. 3. There aren’t too mane bargains in “traditional” bonds. 4. Consider the muni market for tax-exempt income. 5. Stocks aren’t cheap and bonds and cash “don’t offer compelling value.” So investors should go beyond these two asset classes and consider diversifying into alternatives like physical real estate and infrastructure investments.
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