Hedge funds facing smart beta threat http://www.afr.com/business/banking...unds-facing-smart-beta-threat-20160523-gp1xvg Hedge funds, shrinking at the fastest pace since the financial crisis, face a challenge to their lucrative fee model: "smart beta" money pools that charge a quarter of the levy and often don't demand a share of the profits. The search for lower fees will help propel the assets managed by smart beta funds more than fourfold to $US1.2 trillion through 2019 from 2014, Citigroup Inc estimates. The money pools, which operate like exchange-traded funds, typically charge as little as half a percent for managing money. That compares with the traditional 2 per cent of assets and 20 per cent of profits charged by hedge funds, a model criticised by Warren Buffett and pension funds. "The hedge fund brand is under fire," said Ben Johnson, a director of global ETF research at Morningstar Inc. "Lower-fee alternatives are going to represent a serious competitive threat irrespective of whether you are a hedge fund or an active equity or fixed-income manager." Two smart beta funds managed by Goldman Sachs Group now have $US1.1 billion after starting in September, and the amount overseen by WisdomTree Investments Inc's hedge-fund-like strategies doubled in the past 12 months as investors opt for cheaper funds that can be exited quickly. The contrast with hedge funds is stark. They're having their worst performance since the financial crisis, leading Dan Loeb's Third Point in April to describe the industry's performance as a "catastrophic period". Smart beta funds use quantitative models to profit by using factors other than market value to rank securities. The simplest ones track value or growth companies, betting prices will rise, and an increasing number use strategies such as merger arbitrage, shorting equities or macro trading as they seek to make money in falling as well as rising markets. In a survey of investors overseeing almost $US1 trillion, 86 per cent said they expected to increase exposure to smart beta funds during the next three years, Citigroup Inc said last week. Bubble trouble? That popularity can bring its own problems. Rob Arnott, co-founder of Research Affiliates and one of the founders of the discipline, in a paper in February warned that a bubble is forming in smart beta funds. Many strands of the investing style succeeded only because of a stampede in popularity, and they are poised to crash, he wrote. Arnott's conclusions are without merit and investors should follow diversified strategies, Cliff Asness, co-founder of AQR Capital Management, said in April. Goldman Sachs's ActiveBeta Emerging Markets Equity ETF now manages $US640 million compared with about $US20 million in September, according to data compiled by Bloomberg. Its US large-cap equity ETF now manages more than $US500 million, according to the company's website. Assets at a multi-strategy tracker fund managed by IndexIQ Advisors have risen 180 per cent to $US1.1 billion during the past three years, Bloomberg's data shows. Britain's railway pension manager RPMI Railpen has cut its investments in hedge funds to £300 million from £2 billion in 2014. It now has about a third of its £22 billion invested in alternative risk premia, another name for smart beta. "The cost differential between hedge funds and alternative risk premia is very significant, and therefore costs of investing have decreased considerably," said Ciaran Barr, investment director at RPMI Railpen. Hedge funds may respond to the threat by starting or expanding smart beta strategies of their own because the opportunity to manage significantly more money, even at lower fees, will appeal to some managers. "This is a real positive for those hedge funds that have genuine insight and skill, but there are relatively few of these funds," said James Price, a senior investment consultant at Willis Towers Watson Plc. The firm's clients invested $US7 billion into smart beta strategies last year, bringing the total exposure to about $US46 billion. Funds with unique strategies can charge more than 75 basis points, Price said. Worst start Hedge funds lost 0.6 per cent in the first quarter, their worst start to a year since 2008, according to the HFRI Fund Weighted Composite Index. There's no industrywide return available for smart beta funds. Clients pulled a net $US15 billion from hedge funds from January to March, the most since the second quarter of 2009, and the low returns led to criticism of the fee model. Large investors should be frustrated with the fees they pay hedge funds, Warren Buffett said in April, while billionaire Steve Cohen said he's astounded by the limited number of skilled people employed. Some of the best-known names in the $US2.9 trillion industry, including Crispin Odey, Bill Ackman and John Paulson, posted declines of at least 15 percent in some of their funds in the first quarter. "Much of what hedge funds do can be replicated much more cheaply and, gradually, big investors are working out how to do this," said Peter Douglas, principal at CAIA Association, a global group for alternative-investment education. "For once it seems like institutional investors are doing the sensible thing at the right time." Bloomberg
Imho, the problem with hedge funds is the size of the largest ones. It is very difficult these days to eek out a significant edge with a multi billion dollar fund. I do not see the point in comparing hedge funds with "smart beta" funds. The latter will present its own fair share of problems, one of which, is gonna be correlated aggregate fund sizes. Many of those "smart beta" funds are highly correlated, meaning, in times of distress, they will all run for the exits at the same time and hence magnify market moves.
I thought we were actually saying good bye to both? http://www.barrons.com/articles/smart-investors-should-avoid-smart-beta-1460174744
I think Smart Beta is BS. It's a transparent strategy so why pay extra fee for them to do it when you can just replicate it. Btw you don't have to replicate the whole thing. Check out this article: http://blog.alphaarchitect.com/2015/10/24/how-to-pick-smart-beta-etfs/#gs.HmVTPZg They basically proved that to beat Smart Beta ETF all you have to do is buy the index ETF and then just the top 5% of the stocks (on the screener for that "factor" whether it's value, momentum etc) and you will have the same performance with less fees. The only reason why Smart Beta is around right now is because index funds are not "sexy enough" so people looking for something else. This really is only because the market has been flat 2015-2016. And on the other side the large hedge funds like someone else said are too big to implement their profitable strategies effectively and they've been sucking last year and this year. Smart Beta will go away when either 1) we return to a bull market and everyone is making money just parking it in index funds OR 2) the market tanks and smart beta loses lots of money just like their index funds since they're basically the same
I am beginning to understand how the system in Wall Street works: You (Goldman for example) cooked up a scheme, set up a fund for that scheme. The most important next step is to pronounce like mad in the WSJ, CNBC... that it works like a charm. Others then pile in so the asset values go up due to supply and demand and you are proven right. You make your money, then get out to cook up another scheme..... I like Buffett's statement: In the short run the market is a voting machine but in the long run it is a weighing machine.
Q Hedge fund closures return to crisis highs Mary Childs Friday, 18 Mar 2016 http://www.cnbc.com/2016/03/18/hedge-fund-closing-at-fastest-pace-since-global-financial-crisis.html More hedge funds closed their doors in 2015 than at any time since the financial crisis, according to new research, as turbulent markets dragged down the industry's performance. Last year was the worst year for liquidations since 2009, with 979 funds closing, up from 864 in 2014, according to data from Hedge Fund Research. The fourth quarter of 2015 also saw the fewest new hedge funds starting up since 2009, with just 183 openings compared with 269 in the third quarter. The figures capture a period in which many of the industry's marquee names suffered significant losses. The HFRI Fund Weighted Composite index fell 0.9 per cent last year, HFR data show. December saw a flurry of funds converting into family offices, including Michael Platt's BlueCrest and Doug Hisch's Seneca Capital, or shutting entirely as Lucidus Capital Partners did following redemptions. Unnerved by jerky markets, hedge fund clients became fearful of risk and less patient with poor returns in the second half of the year, according to Kenneth Heinz, HFR's president, who said many started asking for their money back from lagging funds. "Investors have become increasingly discriminating in their capital allocations, and the environment for launching a new fund continues to be extremely competitive," he said. The top 20 per cent of funds by assets received about 80 per cent of all new money last year, the prime brokerage group at Barclays found in an analysis of HFR data. So far, this year does not appear to be any kinder for the industry. Between market losses and redemptions, assets in hedge funds fell by $64.7bn in January, bringing total money in the industry below $3tn for the first time since crossing that threshold in May 2014, according to data provider eVestment. Redemptions in January were the worst since January 2009. In February — normally a big month for inflows — about $3bn of new money trickled in, compared with $18.6bn last year, eVestment data show. Investment losses dragged down total assets by almost another $20bn to $2.95tn. The strategy that has been winning the year so far is dictated by computers: systematic hedge funds that surf trends using financial models and algorithms have dominated the lists of the best-performing funds. Trend-following and quantitative specialists, often known as commodity trading advisers due to their legal set-up, tend to profit when markets have a clear direction. They have lost money in four of the past five years. Less competition can help the survivors: JPMorgan's prime brokerage found in a recent survey that more than half of respondents said "crowding" was the biggest reason behind last year's underperformance, driven by a record number of hedge funds chasing too few opportunities. Instead of adding money to hedge funds, many asset allocators plan to recycle capital, moving from one manager to another, with strategies focused on volatility proving the most popular, JPMorgan said. UQ
Q Not dead, just resting A bunch of hedge funds have closed. Has the industry reached its peak? Feb 20th 2016 http://www.economist.com/news/finan...closed-has-industry-reached-its-peak-not-dead IN 1990 hedge funds were still rare birds; 500-odd funds managed around $40 billion, mostly for rich individuals. Few people understood what they did or bothered to find out. By the end of 2015, the sector had mushroomed to include nearly 9,000 funds managing roughly $3 trillion. Along with private equity, the industry was classed as an “alternative asset”, attractive to pension funds and endowments. But a recent wave of fund closures, and the expectation that more will follow, suggest the industry’s era of stratospheric growth may be in the past. On the surface, fund closures are the norm in a cut-throat industry: every year hundreds of fund managers call it quits, only to be replaced by yet more would-be masters of the universe. But the gap between closures and launches is narrowing (see chart). In the first nine months of last year 785 new funds were launched and 674 were closed, according to Hedge Fund Research (HFR), compared with figures of 814 and 661 over the same period in 2014. In 2016, for the first time since the worst of the financial crisis, there may be more closures than launches, says Amy Bensted of Preqin, a data provider. The main reason for the shutdowns is poor performance. “It’s a performance industry. If you don’t perform people take their money and leave,” says Anthony Lawler of GAM, an asset manager. Last year was the industry’s worst since 2011; HFR’s fund-weighted composite index ended down by 1.09%. In the last quarter of 2015 investors withdrew $8.7 billion from the hedgies, according to Preqin. For the first time since the crisis more institutional investors now plan to cut their hedge-fund exposure than to increase it. This year has been no better. With losses of 2.8%, January was the worst month for the industry since September 2011, according to HFR. Market turmoil generated even steeper losses for large funds such as Pershing Square (which was down by 18.6% as of February 9th). Many funds that close have no choice but to throw in the towel. A tough macroeconomic environment, pressure to cut fees, increasing cost of regulatory compliance, and some very bad bets on distressed debt and energy assets, have all made it harder to run a hedge fund today than in the good old days of the 1990s. With investors becoming increasingly risk-averse, knee-jerk redemptions have become more common. For a small fund, if just one investor pulls out that can be the end of the business: 75% of the funds that closed in 2015 managed less than $100m. But there is a second, more surprising set of fund closures. A number of large high-profile funds, such as BlueCrest, Nevsky Capital and more recently, Standard Pacific and Orange Capital, have chosen to return outside capital to investors. This is puzzling; asset managers normally like to keep money. Disappointing performance, poor ratings and redemptions play a role in many voluntary liquidations, too. But many could have continued. Standard Pacific’s founders wrote to investors two weeks ago that “sometimes there is a logical conclusion to even a good thing.” BlueCrest’s Michael Platt, who in December told investors he would return their money, claimed the industry’s fee model was “no longer a particularly profitable business.” Nevsky’s chief investment officer, Martin Taylor, blamed the prospect of another bear market and a change in market structure that meant the fund’s research-heavy approach was less effective than before. One London banker thinks managers like Mr Platt were “just sick of investors’ monthly calls every time an asset drops a few percent.” Compared with private equity, hedge funds have short lockup periods, which means investors can redeem their cash relatively easily whenever they feel queasy about China or the oil price. Some managers have responded to this fickleness by running their funds as private family offices, much like George Soros or his old colleague, Stan Druckenmiller. A lot comes down to personality. Because the hedge-fund boom happened in such a short space of time, lots of today’s biggest managers come from the same generation. Many are tired and fed up; and with their millions made, they have little need to carry on. Moreover, succession planning has not been an industry strong suit: few fund managers have built organisations that will survive them. (Even those that have can run into trouble: investors in Bridgewater Associates, the world’s largest hedge fund, which manages $154 billion and had a very good 2015, were this month treated to a farcical set of mudslinging letters from the firm’s founder and its heir-apparent, asking them to judge each other’s conduct.) Fewer new funds seem likely to appear in 2016. Jonathan Miles, from Wilshire, a pension-fund adviser, thinks the governance and regulatory costs make it harder than ever to start a fund—particularly in Europe, where the regulatory regime has become especially tough (which also helps explain why more European funds closed in 2015 than American ones). Despite their sharp trades and sharper elbows, hedge funds have been slow to evolve. The field has become crowded and a natural selection of the fittest might be just what it needs, says Ms Bensted. Others, like Pierre-Edouard Coiffard of Laven Partners, a consultancy, think the business model of large hedge funds will tend to converge towards that of more traditional asset managers. Only the smaller specialist players will remain “pure” hedge funds. Whether investors will reinvest with the survivors or abandon the industry altogether is yet to be seen. But the days when hedge funds endlessly expanded appear to be over.