By William Davis
The word “hedge”, meaning a line of bushes around the perimeter of a field, has been used as a risk-management metaphor for centuries. “Hedge fund,” the botanical’s ultimate financial offspring, is far more modern…the term was coined in 1949 by a non-investment fellow named Alfred Winslow Jones. Story goes that Jones, while writing an article about current investment trends for Fortune magazine, was inspired to try his hand at managing other people’s money. His idea? To minimize the risk in holding long-term stock positions by short selling other stocks – what we now think of as the long/short equities model. Smart enough to be sure. But Jones’ real genius? Adding a 20% incentive fee as compensation for his role as managing partner.
Yes, there are two paths you can go by,
Today, the hedge fund term is mostly historical. Over time, doubtlessly motivated by an astonishing ability to impose outsized fees, the types and nature of the hedging concepts expanded to fill a virtual stairway to wealth heaven. Nowadays, hedge funds can pretty much do and charge whatever they want as long as they disclose the strategy and its hefty expenses upfront to investors, who by definition are supposed to be rich and smart. As luck would have it, a few managers have occasionally produced stunning returns. Less than occasionally, however, those returns have been the opposite of hedged.
but in the long run…
Take the work of David Einhorn, for example, manager of Greenlight Capital, one of Wall Street’s best-known hedge firms. By way of background, Mr. Einhorn is one of a handful of managers who rose to prominence during the Financial Crisis after placing really large bets the market would tank. Regrettably, at least for those rich and smart folks who collectively threw some $12 billion at Einhorn and his firm over the following years, one propitious bet does not a great manager make. To wit: Coming off six straight years in which Greenlight lagged the S&P 500, Einhorn lost a jaw-dropping 34% in 2018 – 30% more than any near-zero fee, unmanaged S&P index ETF on the Street. To quote the once-lucky manager: “Nothing went right for the entire year.” Except, of course, for the two percent management fee still levied on the firm’s shrinking pile of assets.
There’s still time to change the road you’re on.
Following a wave of redemptions by those now less rich and perhaps smarter investors, Greenlight’s assets have dipped to $2.5 billion or so. Not so sadly, the firm is not alone in its un-hedged troubles. Fact is a number of well-known managers have suffered of late from poor performance and resulting money problems. A good number of hedge operations have actually been trimmed so far as to shut down. For his part, Mr. Einhorn – who still clings to the obscene two and twenty compensation model – claims to have no plans to close or return his investors’ money.
It really makes me wonder.
Frankly, we could care less. Instead, we’re thinking of the great John Bogle, the recently-passed hero to retail investors everywhere, who dismantled Jones’ fat-fee model and laid a blueprint for the little guy to consistently beat the big guys. And it makes me wonder.
What the numbers are saying…
The number of suspected financial abuse of the elderly cases reported to the Treasury Department by banks last year, up 12% from 2017 and more than double the 2013 total.
What folks from the Fed are forecasting for fixed income…
“With the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.”
- Fed Chairman Jerome Powell
“I’m in a position now where I don’t feel there’s urgency. The focus on whether the Fed will raise rates one or two more times this year is a little misplaced at this point. We have time to look at the data as it comes in.”
- Cleveland Fed President Loretta Mester.
“A lot of the heavy lifting has been done. We’re waiting for the committee to be satisfied that they have reached sufficient understanding of what all the moving pieces are.”
- Kansas City Fed President Esther George
“The Fed needs to be looking at their models…because we have strong growth, strong jobs and no inflation. This is a terrific, optimal situation for our country or any country to be in, and I hope the central banks take note.”
- Lawrence Kudlow, director of the National Economic Council
What the facts are saying…
- The S&P 500 climbed 10% from when the partial government shutdown began on Dec. 22 through Friday, the index’s best performance during such an impasse since at least 1976.
- About $0.5 billion flowed out of global equity funds during the week ended Jan. 23, marking the ninth outflow in the last 10 weeks
- Of the 22% of companies in the S&P 500 that reported fourth-quarter earnings results through Friday, 71% of them beat earnings-per-share estimates, in line with the five-year average. The number of companies beating on revenue is below the long-term average.
- Around this date in 1895, the New York Stock Exchange recommended that listed companies should publish annual financial statements and distribute them to shareholders.
What folks with an ear to the Street are saying…
“Even in the best of times, investors can’t dismiss entirely the risk that the U.S. will slide into a recession within the next year. These aren’t the best of times.”
- Heard on the Street columnist Justin Lahart
“Tesla isn’t the only one struggling to make a cheap electric vehicle: General Motors has decided to hitch its EV strategy to a Cadillac. Mass-market EVs will eventually transform the U.S. auto industry—but not quite yet.”
- Heard on the Street columnist Stephen Wilmot
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