Why Hedge Funds Became Endangered Species

By: Andrew_McKillop

Long Illnesses End That Way
The history of the hedge funds isn't written. Attempts at explaining how they started always focus the late-1960s “fluttering heartbeat of modern capitalism”. Stock price volatility increased, and prices started declining, sometimes by a lot, as economic growth declined and inflation rose in several G7 countries. This is the 'classic explanation' why the funds emerged. The London Gold Pool panic of March 1968 is often cited as a key tipping point and date.  After that, hedge funds had a rationale!

Before that date they were considered what they are. Opportunistic speculators feeding off scrapings they can glean from capitalism's casino tables. Gaming chips that fall on the floor, so to speak.

Recently however, the general contact for the funds has turned sour. April 2014 was a bad month for the hedge funds. Eurekahedge, end April, explained it by saying that hedge funds had hit a very rough patch in the first quarter.  Global markets were largely flat-to-negative as US jobs data and the likely taper-down of QE in the US “heightened concerns” that global interest rates may rise faster than previously anticipated.

This is really bad news for hedge funds!

If or when interest rates rise, where do the funds get easy gaming chips to play the markets – any markets – gaming them up one day and down the next, and usually losing plenty of the chaff money chips they throw at the markets?  European markets trended downwards in Q1 2014 as fears of disinflation resurfaced in the Eurozone. In Asia, markets also declined on news of serial disappointing PMI data from China as its credit crunch looms ever closer, and slowing economic growth in India also dented hedge fund performance. Bad news for the “fund community”.

Stockpicking and asset picking prowess, the rationale of hedge funds, is harmed by a stagnant and unchanging economy set on a semi-deflation path to nowhere. The hedge fund industry needs Surprise Changes to destabilize the economy, and grab more pickings that fall off the casino tables of their masters. Today the crisis has deepened, because the funds were fattened on so many years of easy pickings. Some critics dismiss the funds as not even able to "stockpick" their way out of a US Fed and ECB-provided paper lunch bag. These critics say that if QE disappears, so will they.

On A Long Enough Timeframe Nobody Survives
According to some cosmological physicists, insects only emerged on this planet after, and because of, the late Ordovician mass die-off during which 95% or more of all life forms on this planet were destroyed, probably or possibly because of Gamma Ray Bursts. Hedge funds may be a similar freak outbreak of financial life forms, due to freak one-off conditions. Hoping those conditions may return is the hedge fund prayer, but the wait could be long.

For Samuel Beckett it was called 'Waiting For Godot'.

The programmed collapse of hedge funds may be in the offing. They served their time. They enjoyed a break out, like insect life on this planet, profiting from surprise change or catastrophe but now their time is up. We can however be sure they will do the time-hallowed circus act of “going down fighting”. Like the ragtag IMF-financed Ukrainian army of Kiev!

Reuters (22 Nov 2013), citing Hugh Culverstone Jr., said that his experience in the bizniss shows that the $2.25 trillion fund industry “was an easier place for wealthy individuals to make money a decade ago”, but easy pickings still exist – or can be manufactured, he claimed. Prior to 2000, funds were smaller, returns were higher, and managers did more to cultivate the support of well-heeled individuals and greedy-wealthy families - because large institutions like pension funds had yet to embrace the industry. That was to come, later on, but losses rose as the decade wore on.

Put in drastically simple terms, hedge funds in the 1990-2000 era could return 18%-20% per year profits to the players who handed them money. According to analysts today, for example Wells Fargo Bank analysts, US hedge funds struggled to return 7.5% per year on average for 2013.

What we can call the Insect Panic Syndrome – running in all directions when somebody opens the closet and the light peeps in -  now rules in the so-called Hedge Fund Community. Funds are rapidly bailing out of previous can't-fail, long-only, buy-and-hold speculation on Internet, dotcom, alternate energy and biotech stocks, and retreating to healthcare and end-of-life businesses, to “discover value”.  This however treads the same path as the funds before year 2000: the constant search for gimmicks. How about mummification companies as a nice new stock growth opportunity? The hedge fund industry has a bad and deserved reputation for supporting gimmicks, and for an increasing number of investors is a gimmick itself.

Trapping the Guilty and Gullible - Bubble Trouble
One basic problem for the funds is easy to name but complicated in its effects. The financial markets have fallen into a slumber. Volatility has shrunk. The euro has never been so steady against the dollar. Gold has been so-heavily prevented from making a breakout. Major trends such as the rise in Japanese stocks and the slide in the JPY-USD rate have seriously stalled. US government bonds have flat-lined. Banking profits, as shown by the Barclays plc and JPM fiasco have declined in part because the crony banks have to pay at least something to regulators – for their criminal rigging of markets.

What is called “the absence of “predictable volatility” is now driving losses for the funds. In other words, the manna of the bottom feeders has dried up!

Like King Solomon, the funds engaged in game theory—which narrowly defined is the art of beating your opponent by anticipating his next move. The first problem is how to sift the guilty from the innocent when nobody steps forward to avow their guilt. In previous times, during the Middle Ages, when a court couldn't determine whether a defendant was guilty it often turned the case over to priests who administered an "ordeal" using boiling water or smoking-hot iron bars.

The idea was that God, who knew the truth, would miraculously and meticulously deliver from harm any suspect who had been wrongly accused. And identify the guilty.

For the funds, the ordeal they want is a regular-style market panic. The guilty sell out fast, allowing the roaches to move in and “discover value”. They can then pump up stock prices until they are again extreme and unreasonable – and sell out – priming the next market crash. A real service to society!

Without regular market panics and the Inquisition by Investors, the pickings are low – or very low. The Funds are revealed as what they are. Bottom feeder parasites unable to play any constructive role in a normal economy.
Happy stock picking!

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.