Dalton is big in the hedge fund industry, where many hedge fund managers have seen anaemic returns lately. It seems some have even gotten so frustrated at their inability to profit, they’ve retired.
Those two guys aren’t exactly battling for survival out there. They’ve done incredibly well over time, and so they’re proven entities.
I think it just happens to be that they decided that it was time to go to the beach, so to speak.
But at the same time, Dalton says, “choppy price action” has resulted in “anaemic returns” for hedge funds, he said.
He didn’t seem particularly surprised that the two men decided to quit the game.
That was part of the pessimistic part of his interview.
Later, during the same interview, Dalton also said that he does not expect systemic failure.
We’ve already avoided that. A crash would be predicated upon a giant policy mistake like the government stepping away and allowing the thing to try to free trade without their support.
I think they’ve already poured so much money into the market – all their chips are in the centre of the table now. They’re all in on this and I think they’ll continue to put policies in place that support asset prices the best they can.
We’ve also included their transcript of Bloomberg’s entire Dalton conversation, which is very good, if you’re interested:
KEENE: I want to talk about some of the reporting that I really thought was off the mark about hedge funds having a tough time. Did Mr. Druckenmiller and Mr. Pellegrini throw in the towel because they were losing money, which I would doubt, or is it because, if you’re going to do a hedge fund, you’ve got to make a certain amount to make the 220 payout? You’ve got to make a hurdle rate, and making that hurdle rate in this economic environment is going to get tougher and tougher.
DALTON: Well, listen, I mean, those two guys aren’t exactly battling for their survival. I mean, they’ve done incredibly well over time, and so they’re proven entities. I think it just happens to be that they decided that it was time to go to the beach, so to speak. On the other hand, there is no doubt that a lot of the market conditions we’re confronted with now are not particularly well suited to a wide swath of the hedge fund industry. You know, the equity world is faced with a market that is having very, very wide swings in price action. It’s a long-biased industry, let’s face it.
DALTON: So when we get this kind of price action, it’s very difficult to get on longer-duration positions and hold them. And the same goes for the trending world and the macro world. I mean, these are momentum-driven strategies that are not well tuned to this kind of choppy price action.
DALTON: So as a result, returns have been rather anemic.
KEENE: When you look at the anemic returns, let’s bring it down to our listeners and myself. We’re not in hedge funds. Does that just mean you grab the dividend and hope for dividend growth?
DALTON: You know, that’s – to tell you the truth, there are worse strategies out there at the moment. I mean, what I think we’re watching is markets are gravitating to a world in which we’re having sort of deflationary indications, if not outright deflation. And stocks within the universe of equities, which I watch, are basically acting as though the ones that are going to be rewarded best are the companies that are either self-generating cash flow entities or things that can protect their cash flow at a disinflationary environment.
And so, as a result, some of the higher-yielding names, some of the bigger names, obviously the MLP space which provides great dividends, these have been the relative winners in the market. And the things that have been most sensitive to economic activity and consumer activity have the been the worst. And that’s kind of true to form when it comes to what we’ve seen in the data.
KEN PREWITT: There was a long time there, Liam, when nobody much paid attention to dividends.
DALTON: Right. Well, that’s true, because we had a world in which there was an underlying growth dynamic providing for guys to basically run stocks up on the assumption that there was a very high quality growth element to the market, which is revenue growth.
And we’ve had – as we know, over the past few decades we’ve rolled from growth industry to growth industry, whether it be technology, more recently energy. You know, before that consumer staples, pharmaceuticals. So now we’re – we seem to be at a point now where there’s really no high-quality source of growth for the aggregate economy.
And then as a result, dividends become a much more interesting feature to the equity stuff, because we’re seeing actually a strange dichotomy in that conventional thinking believes that when interest rates are low and valuations are low, you simply buy stocks. And that’s a great period to (inaudible) stocks for higher returns later.
I see it a little differently. I mean, I see the fact that these equities have retreated down to rather low valuations as sort of a validation of the slow growth environment we’re going into, and that the yield portion of equities is really the protective feature that people should be looking for.
PREWITT: OK. So as we see corporate cash build up and build up and build up, a lot of it’s going to go to dividend increases or restorations?
DALTON: I think it will. I mean, corporate America – in fact, it’s not that corporate America doesn’t work well. It works too well. You know, people think that businesses have suffered largely from this dysfunction that we had in credit, but I think what it did is it forced business to become extremely efficient. And what they’ve done is they’ve taken headcount down and overhead down, and as a result they’ve built up these large cash positions. And their cash flow, which I mentioned before is something corporations will want to defend, are actually spewing it.
And as a result, we have this sort of strange environment where corporate America is doing really well and all the debt has really piled up on the government side. So I think what you’re going to see is companies are going to become more active when it comes to either dividend increases, or special dividends, or mergers and acquisitions to try and generate some growth.
KEENE: I know secretly – and folks, if you’re just joining us, Liam Dalton, Axiom Management. No secret that it’s been a slow summer, not like the boom of ’09, when there was a lot of help for Wall Street. What do you see as we enter September here in terms of just the anecdotal evidence you’ve seen through the summer? What does it look like as we jump into September and October?
PREWITT: Yes. The weight of the evidence suggests that we’re – that economy continues to soften. However, as we see this morning, any grain of evidence of a growth dynamic and we’re going to lurch upward. And this has sort of been the playbook since the late April high that we had and the data came off. Really, we’ve been trending down since early April. The only thing that interrupted it and pulled it to the upside were the earnings releases in July which were, once again, a little better than expected, corporate America.
KEENE: Yes, that’s a big deal here. There’s a presumption here it’s going to get slower. Who said that – when you look at the productivity of the nation, who says corporate earnings have to get slower?
DALTON: Well, you know, corporate earnings, in fact, are in a position right now where you look at how strong they’ve been relative to expectations, and where margins are, and it simply conflicts with the data from the standpoint, particularly on the consumer side of the economy. And we’ve seen this reflected within the market. I mean, the retail sector and some of the consumer-sensitive sectors have been pounded, while some of the safer sectors and the more defensive issues have been rotated into capital-wise.
So, you know, I think the market is leading me to believe that we’ve probably seen the best returns relative to expectations, but I think you make a good point, Tom, and that is we’re really not set for another collapse.
DALTON: I mean, you know, systemically, we’re out of the woods, I think, and I think there will be some ugly imbalances. But over time, you know, the pig will make its way through the python. It’s really more a case of trying to normalize economic conditions. And stocks are having a tough time sort of finding equilibrium relative to this new economic model.
KEENE: Scott e-mailed in a very thoughtful note here on the hedge fund business. Liam, it’s a smart note from Scott, who’s clearly in the business and makes very clear it’s a new world out there, and that managers need more from their investors. Investors really want a lot more information from managers. Is it going to be tougher to handle investors in the future?
DALTON: You know, investors are requesting and frankly requiring a higher level of transparency, a higher level of liquidity. It’s all a result of the aftermath of the experiences we’ve had over the past few years, and frankly with net returns over the last decade being subpar. I don’t think it’s going to be unmanageable, but I think it’s just going to be a matter of the industry answering to the realities of the demand side.
I mean, frankly, it used to be that the managers were really in control of the dynamics, the structural dynamics of the industry. And I think that relationship has now shifted, and I think that the investor base is now firmly in control of the terms under which they’ll give capital to outside managers. And that process is unfortunately, possibly right now, swinging a bit too far. The pendulum probably likely flows a little bit backward towards equilibrium, where we can see a better balance of power. But the investor is in control right now.
PREWITT: Well, Liam, that ADP report sort of underscores all this talk about a slowdown in the economy. When do things get back to normal?
DALTON: Well, that gets into the argument of, is this experience we’re going through cyclical or is it structural? You know, my argument would be that the employment element of this looks a bit structural, and that is as a result of sort of the efficiencies that corporations can drive.
You know, they can supplant workers with technology and with higher productivity from smaller worker bases with certain exceptions, but this is a dynamic I think that’s going to stay with us for a long time.
As far as really where we stand in relation to credit, I mean, this is another structural element that I think is going to put growth limits on us for really a significant amount of time. And that is every major longer-duration expansion we’ve had since the ’20s has been accompanied by credit growth, and we do not have that dynamic now.