Staying Out of One’s Own Way
As we progress into 2015 many investors are in the process of tallying up their winners and losers and deciding on this year’s allocations. This can be a healthy exercise, but not without out its potential pitfalls. The natural inclination for most investors (us included) is to sell the losers, and replace them with managers that have had much stronger performance. This is true on a macro level as well, as investors rethink strategies and asset classes that have underperformed recently and are drawn to those with superior recent returns. Unfortunately, research has shown this to be a losing strategy; by the time a manager, asset class or strategy has become attractive it is typically in the late stages of its outperformance and vice versa. This certainly makes allocating and re-allocating a much more anxiety producing task.
So what is the answer? Investors tend to feel the need to do something, and often it’s the wrong thing. As we’ve repeatedly pointed out in the past, the key isn’t necessarily reacting to recent performance, but instead understanding what drives the returns of your managers, asset classes, and strategies. This leaves an investor with a solid foundation for determining whether a manager or strategy performed as expected; deviations from this expectation, not absolute return levels, should then drive re-allocation decisions.
Liquid Alts Corner
Managed futures funds continued to have very strong performance, averaging nearly 4% during the month and bringing their one year return to over 15%. As would be expected given the struggling equity markets, bear market funds also had solid performance. However, the longer term performance has still been abysmal, annualizing at nearly -24% over the last five years. Long/short equity was the worst performing group, losing 1.40% during the month.
Multialternative started the year off with a strong month of flows, gaining over $1 billion in new assets during January. The largest contributor was the Principal Global Multi-Strategy Fund which saw nearly $500 million come into the fund during the month. Managed futures also had a strong month, gaining $800 million in assets, which wasn’t surprising given the strategy’s recent positive performance (up more than 15% over the last 12 months). AQR and Natixis saw the biggest flows, each bringing in more than $200 million in assets. While the long/short category showed flat flows and market neutral more than $1 billion in negative flows, these numbers are somewhat misleading as they are dominated by what appear to be shifts between PIMCO funds. Specifically, the PIMCO Worldwide Fundamental Advantage Absolute Return Strategy Fund (market neutral) saw more than $800 million leave, while the PIMCO Worldwide Long/Short Fundamental Strategy Fund (long/short equity) had a similar amount come into the fund. The MainStay Marketfield Fund continued to shed assets, losing nearly $900 million during January.
American Century Entering Liquid Alts Space
American Century has been fairly quiet on the liquid alternatives front as the product category has experienced a boom since the 2008 financial crisis. In 2011, the firm launched two “130/30” funds and a market-neutral fund, and it has been operating another equity market neutral fund since 2005, but American Century has largely been on the sideline of the liquid alts movement. On February 3, American Century filed paperwork with the Securities and Exchange Commission (SEC) seeking approval for three new alternative funds. The firm has also initiated a new brand for its alternatives business and filed to trademark the brand “AC Alternatives,” which will be used on the new line of alternative mutual funds
Salient Partners to Acquire Forward Management
Salient Partners is buying Forward Management in an effort to build scale in the rapidly growing liquid alternatives space. The deal, announced Wednesday and scheduled to close by July, creates a $27 billion asset management firm, including 36 mutual funds, separate accounts, and at least one hedge fund. Terms of the transaction were not disclosed.
Even though Houston-based Salient, with $21 billion under management, is the acquiring firm, Salient president Jeremy Radcliffe referred to Forward as the “more mature platform” in terms of liquid alternative strategies. Of the firm’s total assets, less than $2 billion is represented by six mutual funds. The rest is in separate accounts and private funds. San Francisco-based Forward has 30 mutual funds totaling $4.5 billion under management
Hedge Funds In The News
Ranked: Hedge Funds that Investors Love-and Hate
Here’s a lesson for hedge fund managers: Listening to your clients pays off.
Firms that ranked high on Alpha’s Hedge Fund Report Card this year weren’t always investor favorites. But Ken Griffin’s Citadel and other shops have increased risk controls and various operational functions while posting strong returns; earning them an “A” from current and potential clients surveyed by the Institutional Investor hedge fund-focused publication.
The annual ranking looks at “alpha” produced by managers—skill-based returns above market benchmarks—in addition to factors like infrastructure, transparency, and independent oversight. Institutional investors such as pensions and endowments evaluated the 100 largest hedge fund firms; 58 got enough of a response to receive a grade
Man Group Buys NewSmith Equities Manager
Man Group Plc, the world’s largest publicly traded hedge-fund manager, agreed to buy the equities management business of NewSmith to expand in Tokyo and London.
Man Group, which manages $72.3 billion, plans to complete the deal in the second quarter, it said in a statement on Friday. London-based NewSmith, with $1.2 billion of funds under management, is 40 percent-owned by Sumitomo Mitsui Trust Holdings Inc., Japan’s fourth-biggest bank by market value, which said it supports the deal in a separate statement.
“The acquisition brings a new dimension to the firm, including a Japanese hedge fund and an excellent team in Tokyo as well as adding further scale to our London business,” Man Group President Luke Ellis said in the statement.
Chief Executive Officer Manny Roman has been expanding Man Group through acquisitions, adding more than $16 billion in assets last year. Man Group said in December it would buy Silvermine Capital, a U.S. leveraged loan manager, following acquisitions of U.S. fund-of-hedge-funds manager Pine Grove Asset Management and Numeric Holdings, a Boston-based quant manager
Some Hedge Funds Seeing Value in Energy Stocks
Investing in energy in recent months has required a strong stomach. The price of a barrel of crude oil, after trading around $100 in June, fell to about $43 in January, putting pressure on a range of oil and gas companies and funds that invested heavily in energy stocks. The filings show Mr. Buffett’s Berkshire Hathaway sold its 41 million shares of Exxon Mobil (NYSE:XOM) during the fourth quarter, while Greenlight Capital, David Einhorn’s hedge fund, sold its entire two million-share stake in the British oil giant BP. Barry Rosenstein’s Jana Partners sold its 3.4 million shares in the Apache (NYSE:APA) Corporation (NYSE:APA) the oil and gas company.
To some hedge fund managers, the rout apparently provided an opportunity for bottom fishing. Mr. Loeb’s Third Point acquired five million shares of Phillips 66 (NYSE:PSX), a stake worth $384.5 million as of Tuesday. Omega Advisors, meanwhile, acquired 2.1 million shares of Laredo Petroleum and 652,500 shares of Sanchez Energy Corporation. But at the same time, Omega sold about 29 percent of its big stake in SandRidge Energy, ending the quarter with 32.2 million shares.
ValueAct Capital, an activist hedge fund, acquired big new positions in Halliburton and Baker Hughes (NYSE:BHI), two oil field services companies that agreed to a $34.6 billion merger in November. The two stakes, each worth more than $900 million, could make ValueAct a forceful advocate for the deal, which will be subject to shareholder votes in March
And Lastly…
Werewolf Hedge Fund Manager Fakes His Own Death
A 33-year-old “hedge fund” manager told one investor he had died of a heart attack and another that he was like a werewolf in order to avoid paying back clients. Moazzam “Mark” Malik made the statements during an effort to cover up a scheme in which he allegedly stole roughly $850,000 from 16 investors, according to the SEC. Malik used the money to purchase jewelry, attend Harvard extension courses, and find a spouse, the agency said. As recently as late January, he raised $100,000 from a single client. “By pretending to be a successful hedge fund manager, Malik conned investors into bankrolling his lavish lifestyle,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “Besides luxury travel, dining, and jewelry, investor funds paid for Malik’s continuing education courses at Harvard and his subscription to a matrimonial matching website.
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