About That Hedge Fund Renaissance You Were Told Of Yesterday

Courtesy of Joshua M Brown, The Reformed Broker

For some reason, yesterday I heard the soundbite that “Hedge funds are back! On pace to have their best month/quarter/year since blah blah blah” repeated at least a dozen times.

Absurd. I can think of several high net worth people I’ve spoken with in just the last few weeks that would give up a firstborn child to get away from a gated fund or two.

The hedge fund industry claims many of the most talented managers on earth…but it also features some of the most insipid me-too acts since the tragic Boy Band Craze of the late 90’s launched a thousand cheesy singing groups from Orlando, Florida. OK, that was a ludicrous analogy, but still…

Many of the late-comers and also-ran funds have already been been drummed out of hedgieland and most funds are but a shadow of their former selves asset-wise.

That said, the real story you didn’t hear yesterday is that money is still fleeing the industry at an astounding rate…

According to The Hennessee Group:

Investors have continued to pull money out of the hedge funds after having removed a record $152 billion in the last quarter of 2008.

In July, the most recent month for which data is available, clients redeemed $20 billion from hedge funds, significantly more than the $6.9 billion they pulled out in June.

Yes, that’s correct, triple the amount of money was pulled from hedge funds in July than in the prior month.

Too be fair, some of that is related to redemption requests that could not be honored during the heart of the liquidity crisis and some is probably from the worsening conditions in employment and real estate, which forces investors to move money even from performing assets.

But the breathless reporting of the Return of the Hedge Fund we heard yesterday for the most part neglected the fact that the predilection of the wealthy for more plain vanilla investment management has still not changed. Investors are clearly taking more risks than they were willing to last winter, but they want transparency, control and liquidity – three things that the hedge fund industry cannot offer them, for the most part.

This goes for individual investors, endowment investors, pension investors, sovereign wealth investors, corporate investors, international investors, etc.

I predicted this change in investor tastes 9 months ago and I don’t see this trend abating right now, despite the fact that as a group, hedge funds have outperformed the S&P 500 year-to-date by 5 whole percentage points, plus 17% to plus 12% through August.

Most investors will gladly take the 12% and leave the 17% return to someone else.