Last month billions were invested in hedge funds. In search of high returns, investors are turning once again to hedge funds and their risky approaches. But there are more losers than winners overall in the hedge fund industry and many funds will probably tip over before the year is out.
Hedge funds treading water
The hedge fund business drew $22 billion from investors in March, the highest rate in over a year, according to Hedgefund.net. Overall, the hedge fund industry is managing $2.5 trillion, 83 percent of the all-time highs registered in 2008. There are nevertheless many hedge funds attempting to get back to this peak where they can start making money again. In fact, Hedgefund.net reports that about 35 percent of 2,500 funds that voluntarily report performance have yet to return to their high water marks. Until the hedge funds get back to the peak, they cannot charge performance fees, although investors are making money. A 35 percent return needs to be given to a hedge fund account that lost 25 percent during the meltdown. This is the only way it can return to normal. The fund may not be able to return to getting 20 percent for years.
Hedge fund industry manipulation
Established hedge funds with billions in assets struggling to reach their high water marks keep the lights on with management fees–about 2 percent of those assets, and charge customers for expenditures. There were other hedge funds that lost too much and just shut down, re-opened and got new investors. Then it is business as usual, which involves classic forms of hedge fund market manipulation. Most hedge funds will purchase their own holdings in the last few seconds before a quarter is about to end in order to have performance territory fees. After their fabricated outcomes are recorded, they dump the stock. This was confirmed in a study done by Swiss Finance Institute, Toulouse School of Economics, Wharton and Ohio State. The research found evidence that shows stocks with a high percentage of hedge fund ownership benefit from startling last-second rallies more often than would be considered normal. There were lower returns on the first day of the month for stocks ! with high hedge fund ownership after the manipulation.
Huge increases for hedge funds
With so many hedge funds struggling to make a recovery, business experts predict a hedge fund shake-out in 2011 as underperforming funds lose top traders to rivals and disappear from the landscape. Figures show this is already taking place all the time. There was a 41 percent return in 1,400 hedge funds on average. Hedgefund.net reports this after they were all tracked. However during that time, 3,000 hedge funds fell by the wayside. According to Brett Arends at MarketWatch, the good numbers reported by the hedge fund industry only consist of a few of the survivors. He conducted his own 10-year comparison with a “vanilla portfolio” and 2,229 hedge funds that started in 2001. There was a 94 percent average on the vanilla portfolio. If the industry were to match the vanilla portfolio, it would need all the hedge funds that failed to do better. They would have all needed to get 60 percent. There were 535 survivors which one fifth did not even do well.
Citations
Market Watch
marketwatch.com/story/the-truth-about-hedge-funds-1302121763886?pagenumber=2
New York Times
dealbook.nytimes.com/2011/04/06/many-hedge-funds-still-smarting-from-the-financial-crisis/?src=dlbksb
All About Alpha
allaboutalpha.com/blog/2011/03/02/hedge-funds-and-stock-manipulation-perpetrators-accomplices-or-just-in-the-wrong-place-at-the-wrong-time-again/
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