Brief: Investors have thronged the largest hedge funds since the last financial crisis as they sought safety in size. Now, they’re paying a hefty price. Supersized funds are failing their clients during a period of market upheaval that in theory should pose an unprecedented chance to make money. Instead of profiting, though, some of the world’s biggest hedge funds have barely managed to protect their investors from losses. A Hedge Fund Research gauge that gives more weight to larger players was down 4.4% this year through September, while all hedge funds on average managed to eke out a small profit. Gold-plated names that have slumped include Bridgewater Associates, quant powerhouses Renaissance Technologies and Winton, Michael Hintze’s CQS and Lansdowne Partners. The losses are largely hurting influential institutional investors -- pension funds, insurers and endowments -- that contribute most to the industry’s assets and back the biggest funds. A reckoning looms as clients accelerate their flight. Investors pulled $89 billion from hedge funds in the first nine months of the year, mainly from large firms, according to Eurekahedge data. “A very large portion of the assets invested in large hedge funds have not performed all that well and so it’s causing investors to reassess their objectives,” said Chris Walvoord, global head of hedge fund research at investment consultant Aon Plc. They’re asking, “Why am I invested in this? What’s the purpose?”
Brief: U.S. stocks decline picked pace on Monday afternoon, setting the Dow for its worst day in more than seven weeks, as soaring coronavirus cases and a political deadlock over the fiscal relief bill raised doubts about the fate of the economy recovery. New infections have touched record levels in the United States, with El Paso in Texas asking citizens to stay at home for the next two weeks. In Europe, Italy and Spain imposed new restrictions. Travel-related stocks, vulnerable to COVID-19 related curbs, dropped. The S&P 1500 airlines index fell 5% and cruise line operators Carnival Corp and Royal Caribbean Cruises Ltd shed more than 9.5% each. “People are nervous about the expansion in cases,” said Christopher C. Grisanti, chief equity strategist, MAI Capital Management, Cleveland, Ohio. “The administration has said it does not want to slow down the economy yet as cases rise they may not have a choice.” Energy index tracked a more than 3% fall in oil prices. Other economically-sensitive industrials and financials sectors posted the steepest percentage declines among S&P sectors.
Brief: The coronavirus pandemic has dealt a body blow to the quantitative model-based style of investing, with a majority of the firms using such strategies negatively impacted, a study by Refinitiv has found. In a report, financial data provider Refinitiv said 72% of such investors were hurt by the pandemic. Some 12% declared their models obsolete and 15% were building new ones. Machine-learning refers to the use of complicated mathematical models and algorithms based on historical data in order to make predictions without being explicitly programmed to do so. While such machine-driven models had success in the past as historical correlations among different asset classes held firm, they have suffered in the wake of the pandemic as these linkages have broken down. These quantitative models have also suffered in 2020 as the amount and complexity of the inputs that go into such algorithms to generate trading signals have exploded in recent years. “COVID-19 presented a large shift in many of the market dynamics and many institutions would have had to revisit a large portion of the models that they had in order to make them cope with what has been extreme market events,” said Amanda West, global head of Refinitiv Labs at Refinitiv.
Brief: Bob Prince, co-chief investment officer of the world’s biggest hedge fund at Bridgewater Associates, said an unusual combination of low interest rates and rising debt during the pandemic will “severely” limit potential growth rates in the aftermath of the pandemic. Fiscal policy will remain the primary source of stimulus, fueling the risk that government debts become too high and leading to pressure on exchange rates, he said. These problems will be more acute outside of Asia. “Global investors tend to be very Western-centric,” Prince said on Bloomberg TV. “The East is nothing like that. It’s not just China. A number of countries have done a much better job managing the virus without ballooning their fiscal deficits and printing money.” Bridgewater’s Prince Says Bonds Are Risky in Zero-Rate World Prince said his colleagues in China meet at the office without masks, whereas Bridgewater’s U.S. employees still work from home. “That economy is much closer to normal and the pricing of assets is much closer to normal,” he said. “There’s a substantial divergence occurring economically between East and West. As investors, you shouldn’t let yourself get completely locked into the West.”
Brief: It takes a high degree of due diligence for investor capitalists to rifle through the mass number of investment opportunities to find that next big initial public offering (IPO). Just like how Microsoft was started in a garage, a lot these new generation IPOs will probably start in someone’s bedroom given the way Covid-19 has changed the world. According to a CNBC MakeIt article: “Another change toward a work-from-home world courtesy of Covid-19: Bill Gurley, who has invested in the likes of Uber and Zillow, says he’s now investing in start-ups that do not have a traditional office.” “We are now backing start-ups without offices, which isn’t something we had done before,” Gurley, who was a long-time investor with Silicon Valley venture capital Benchmark, said in the article. Furthermore, the article pointed out that “in a June survey by venture capital firm NFX, ‘60% of VCs said they were less likely to invest in start-ups that had the majority or all of its employees working remotely,’ the San Francisco Business Times reported.” “Remote companies are seen as more fragile, because employees can easily leave for the next remote job, NFX managing partner James Currier told the publication,” the article added. “And according to Trulia co-founder and NFX managing partner Pete Flint, being nimble and creative, as start-ups need to, is more easily accomplished when people are together in the same physical space.”
Brief: The COVID-19 pandemic has changed the opportunity set and risks to which institutional investors are paying attention, with credit and potential bankruptcies high on the agenda. One challenge has been finding the right combination of the "least-worst" performing asset classes, said Troy Rieck, CIO of the A$13 billion ($9.2 billion) LGIAsuper, Brisbane, Australia, on a panel discussion Friday at the Pensions & Investments WorldPensionSummit conference. Mr. Rieck added that the super fund's executives do not try to second-guess forecasts related to political risks arising from elections or geopolitics when building the portfolio. Executives are trying to build portfolios with a focus on credit rather than equity, he said. Mr. Rieck added he is excited about infrastructure debt, real estate debt, regulatory capital arbitrage, high-yield and bank loans. "If it is credit-related, I want to own it," he said, adding that investors get "zero for cash and nothing for bonds. Besides those assets, "there is not much out there we like," he said. It could be a challenging decade if inflation does turn up, he said.