Tag Archives: Hedge Funds

The Game Stop Fairy Tale And Its Lesson, by Michael Lebowitz

Posted on February 3, 2021 | Leave a comment

The big picture lesson from Game Stop is that financial markets are government-sponsored casinos designed to enrich one class of players at the expense of the other class. From Michael Lebowitz at realinvestmentadvice.com:

nce upon a time, there was a zombie corporation named Game Stop ($GME). For the last few years, it has been circling the bankruptcy drain. Similar to Blockbuster, its business model, renting and trading video games and equipment, is going the way of digital streaming. GME’s brick and mortar operations held a competitive advantage versus most competitors. Unfortunately, in today’s digital streaming world, they are minnows, prone to attack by the likes of Amazon.

We tell the story of GME because it’s fascinating. More importantly, however, it holds an important lesson about the level of speculation the Fed is fostering.

Preamble- Know Who You Are Squeezing

As we wrote this article, the short squeeze phenomena were shifting toward the silver sector. There are two essential differences between shorting SLV, an ETF, and GME. First, because SLV is an ETF, dealers can create shares. Such makes it more difficult to squeeze. To create shares, the dealer must deliver silver in exchange for the new shares.

Second, while squeezes in GME primarily only affect GME shareholders, SLV affects the price of silver itself. If SLV continues to rise, it brightens the outlook for silver miners but raises input costs for manufacturers that use silver in their production process. Silver is widely required to produce many high tech goods; therefore, a rising price has economic implications. As such, it is a more critical squeeze to follow, and no doubt the Fed is closely watching.

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In Defense of Hedge Funds. Gamestop Squeeze Hides Market Excess Risk, by Daniel Lacalle

Posted on February 1, 2021 | Leave a comment

Short sellers are often heroes, exposing bad managements. From Daniel Lacalle at dlacalle.com:

The short-squeeze forced in Gamestop and other stocks through Reddit’s WallStreetBets has generated a massive media frenzy against hedge funds and comments all over social media hailing the decision of a group of small investors to trigger a huge repurchase of a beaten-down stock.

The first thing we need to understand is that hedge funds play an essential role in markets. They provide liquidity, and in many cases are the ones that buy when the largest proportion of equity and bond markets, long-only investment funds, panic, and sell massively.

It is interesting to see how the average citizen and the media tends to blame hedge funds for market crashes when these investment firms account for less than 3% of global assets under management.

When markets crash it is not because of hedge funds attack, but because long-only large funds sell. However, the activity of shorting (borrowing a stock and selling it to repurchase it afterward at a cheaper price) has been demonized numerous times, and usually by CEOs of companies that are missing earnings, underdelivering on their strategy, and destroying value.

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“This is a financial revolution. . .” by Simon Black

Posted on January 28, 2021 | 3 comments

Nothing infuriates the corruptocrats quite so much as when the plebs manage to turn the tables on them. From Simon Black at sovereignman.com:

At precisely 2:32pm Eastern time on May 6, 2010, the US stock market started to drop.

The decline was sudden, and vicious. Within minutes, more than $1 trillion of market capitalization had vanished, with the Dow Jones Industrial Average losing nearly 10% of its value.

This event became known as the ‘Flash Crash’. And early explanations pointed to the big investment banks and their high-tech trading algorithms, i.e. software that could buy and sell stocks without human involvement.

When the market started its decline that day, banks’ trading algorithms went haywire and started selling everything. This caused the market to decline even further, which triggered the algorithms to sell even more.

The humans were powerless to stop it. There were stories of panicked tech teams at investment banks frantically ripping cables out of the floor trying to shut down the machines.

But the selling went on for 36 minutes… during which time the banks and big funds racked up enormous losses.

For me, however, the Flash Crash was great. I was ‘short’ the stock market at the time, meaning I had bet that the market would decline.

And when the market dropped by more than 1,000 points, I happily cashed in.

But two days later I received an email from my broker explaining that they were CANCELING my trade.

The poor little investment banks had lost money because their fancy algorithms didn’t work. So the exchange was giving them a ‘do over’ at my expense.

Incredible. It hadn’t even been two years at that point since the banks had to be bailed out at taxpayer expense during the Global Financial Crisis of 2008.

Then, 20 months later, the Flash Crash happened. And the banks were simply able to wipe all their losses away.

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Confirmed: Fed Bailed Out Hedge Funds Facing Basis Trade Disaster, by Tyler Durden

Posted on March 21, 2020 | Leave a comment

What would a financial crisis be without bailouts for a lot of scummy types who don’t deserve it? From Tyler Durden at zerohedge.com:

Back in December, when the world was still confused about what exactly happened before (and after) the September repocalypse – which has since exploded thousand-fold resulting in the Fed now doing daily $1 Trillion repo operations – we said that in addition to the implicit bailout of JPM (which we described here first, and subsequently others), by restarting its repo operations the Fed was also bailing out dozens of hedge funds engaging in highly levered trades involving a relative value compression trade in the Treasury cash/swap basis… almost identical to what LTCM was doing ahead of its 1998 bailout, which is also why we titled the article “The Fed Was Suddenly Facing Multiple LTCMs.”

In a nutshell, the article explained why and how the return of the Fed’s repo ops was nothing more than the Fed preemptively bailing out all those hedge funds that would have imploded had basis trades gone haywire. Below is a key excerpt from that post:

One increasingly popular hedge fund strategy involves buying US Treasuries while selling equivalent derivatives contracts, such as interest rate futures, and pocketing the arb, or difference in price between the two. While on its own this trade is not very profitable, given the close relationship in price between the two sides of the trade. But as LTCM knows too well, that’s what leverage is for. Lots and lots and lots of leverage.

We also said that “hedge funds such as Millennium, Citadel and Point 72 are not only active in the repo market, they are also the most heavily leveraged multi-strat funds in the world, taking something like $20-$30 billion in net AUM and levering it up to $200 billion. They achieve said leverage using repo.”

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944 Trillion Reasons Why The Fed Is Quietly Bailing Out Hedge Funds, by Tyler Durden

Posted on January 19, 2020 | Leave a comment

Usually financial crises start or quickly accelerate where leverage ratios (the amount of debt speculators take on relative to their equity) are the highest. The impending financial crisis will be no different, which makes highly leverage hedge funds speculating in derivatives markets a potential flash point. From Tyler Durden at zerohedge.com:

On Friday, Minneapolis Fed president Neel Kashkari, who just two months earlier made a stunning proposal when he said that it was time for the Fed to pick up where the USSR left off and start redistributing wealth (at least Kashkari chose the proper entity: since the Fed has launched central planning across US capital markets, it would also be proper in the banana republic that the US has become, that the same Fed also decides who gets how much and the entire democracy/free enterprise/free market farce be skipped altogether) issued a challenge to “QE conspiracists” which apparently now also includes his FOMC colleague (and former Goldman Sachs co-worker), Robert Kaplan, in which he said “QE conspiracists can say this is all about balance sheet growth. Someone explain how swapping one short term risk free instrument (reserves) for another short term risk free instrument (t-bills) leads to equity repricing. I don’t see it.”

To the delight of Kashkari, who this year gets to vote and decide the future of US monetary policy yet is completely unaware of how the plumbing underneath US capital markets actually works, we did so for his benefit on Friday, although we certainly did not have to: after all, the “central banks’ central bank”, the Bank for International Settlements, did a far better job than we ever could in its December 8 report, “September stress in dollar repo markets: passing or structural?”, which explained not just why the September repo disaster took place on the supply side (i.e., the sudden, JPMorgan-mediated liquidity shortage at the “top 4” commercial banks which prevented them from lending into the repo market)…

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Why Hedge Fund Hot Shots Finally Got Hammered, by David Stockman

Posted on September 5, 2015 | Leave a comment

From David Stockman at davidstockmanscontracorner.com:

The destruction of honest financial markets by the Fed and other central banks has created a class of hedge fund hot shots that are truly hard to take. Many of them have been riding the bubble ever since Alan Greenspan got it going after the crash of 1987 and now not only claim to be investment geniuses, but also get downright huffy if the Fed or anyone else threatens to roil the casino.

Leon Cooperman, who is an ex-Goldman trader and now proprietor of a giant fund called Omega Advisors, is one of the more insufferable blowhards among these billionaire bubble riders. Earlier this week he proved that in spades.

It seems that his fund had a thundering loss of more than 10% in August during a downdraft in the stock market that the Fed for once took no action to counter. But rather than accept responsibility for the fact that his portfolio of momo stocks took a dive during a wobbly tape, Cooperman put out a screed blaming the purportedly unfair tactics of other casino gamblers:

Lee Cooperman, the founder of Omega Advisors, has joined the growing chorus of investors blaming last week’s stock market sell-off — and his own poor performance in August — on esoteric but increasingly influential trading strategies pioneered by hedge funds like Bridgewater.

Well now. Exactly how was Bridgewater counting the cards so as to cause such a ruction at the gaming tables?

In a word, Ray Dalio, the storied founder of the giant Bridgewater “All-Weather” risk parity fund, has been doing the same thing as Cooperman, and for nearly as many decades. Namely, counting the cards held-out in plain public view by the foolish monetary central planners domiciled in the Eccles Building.

To be sure, Dalio’s fund has had superlative returns and there is undoubtedly some serious algorithmic magic embedded in Bridgewater’s computers. But at the end of the day its all a function of broken capital markets that have been usurped and rigged by the Fed.

To continue reading: Why Hedge Fund Hot Shots Finally Got Hammered

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How hedge-fund geniuses got beaten by monkeys — again, by Brett Arends

Posted on June 26, 2015 | Leave a comment

The hedge fund guys get 20 percent of assets under management and 2 percent of profits; the monkeys get bananas. Whether or not, in the long-term, monkeys outperform hedge fund managers (they probably do) they sure are a lot cheaper. From Brett Arends at Insider Monkey, via theburningplatform.com:

The dumbest simple index will beat the smartest guys on the Street

The average hedge fund has produced a worse investment performance in the first half of this year than a portfolio consisting of a savings account at your local bank and a random collection of stocks picked by a blindfolded monkey.

Stop me if you’ve heard this one before.

According to the benchmark HFRX Global Hedge Fund Index, tracked by Hedge Fund Research Inc., the average hedge fund has earned its investors just 2.4% so far this year net of fees.

By contrast, the average stock in the MSCI World index of the developed countries’ equity markets is up 7.7%.

Hedge-fund defenders object that it’s not fair to compare funds directly to the stock market, because hedge funds are “managing risk” and so on. You have to compare them to an overall balanced portfolio of stocks, bonds and cash, right?

OK.

A few years back a study conducted on behalf of the endowment of Cambridge University’s Clare College found that, historically, the best risk-managed simple portfolio for a long-term investor had usually been a balance of 80% stocks and 20% cash (or equivalent, such as Treasury bills), rebalanced once a year.

You can play around with simple portfolios but this will do as well as any. It’s about as simple as you can get.

Someone who put 20% of their money in a federally insured bank savings account, and the other 80% in a random collection of stocks from around the world, picked by monkeys, would be up about 6.2% so far this year. (And that’s assuming for the sake of simplicity that you earned 0% interest on the savings. In reality, you could have done slightly better)

In other words, they would still have earned more than twice the returns of the average hedge fund.
Gosh, the money and effort that goes into those hedge funds really paid off, didn’t it?

Makes you glad your golf-club buddy got you an “in” to the P.T. Barnum Proprietary Algorithm Super Alpha Beta Gamma Buy Me An Omega Global Risk-Managed Wowza Fund, doesn’t it?

Just think of all those math Ph.D.s they hired!

Just think of how hard they’re working! Up before dawn, home after midnight, lunch-is-for-wimps, running on their treadmill desks, popping pills for the blood pressure.

Work, work, work.

“Ripping the markets’ face off.”

“Pulling the trigger” on deals.

Yeah, baby! Real men! Real trading! Real bonuses!

Meanwhile, over here, a bunch of monkeys and a bank account.

Oh well.

This is nothing new. Last year, according to Hedge Fund Research Inc., the average genius hedge fund lost 0.6%. Meanwhile stocks picked by monkeys, plus 20% in the bank, gained 2.3%.

The year before, the average hedge fund earned 6.7%. The monkeys and the bank account did three times better, earning 21%.

In 2012 the monkeys and cash beat the hedge funds by nearly four to one, earning 13% compared to 3.5% for the funds.

It shouldn’t really surprise us. It costs a lot of money to run a great hedge fund — in salaries, bonuses, and all the rest. (Just think of the health-insurance costs when the traders have heart attacks) Those costs have to come out of investors’ returns. So even if the hedge funds did as well as the overall market, before fees, investors would lose out on a net basis.

Your typical hedge fund charges around 2% of the assets as a basic fee, plus 20% of any profits. Do the math. If the average investment portfolio earns 6% a year, your hedge fund manager has to earn 9.5% before fees before you even break even.

In other words, the manager has to beat the market by about 60%. Per year. Good luck with that.

This is the point where we should add that these hedge-fund indexes flatter the industry’s performance, because they are weighted heavily towards the funds that survive and report data.

With all this dismal performance, investors are fleeing hedge funds, right?

Sure, why not.

According to a recent report in the Wall Street Journal, investors instead have been piling in.

According to data supplied by Barclays, about $2.5 trillion is invested in these hedge funds worldwide.

Wall Street. The only place on Earth where the lambs lead themselves to slaughter, to the sound of turkeys cheering for Thanksgiving.

http://www.theburningplatform.com/2015/06/26/how-hedge-fund-geniuses-got-beaten-by-monkeys-again/

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