Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

There's a theory being floated by a certain nonaccredited investor that an inverse correlation exists between a hedge fund's returns and the length of its year-end letter. In other words: the worse the returns, the longer the letter.

We'll leave it to some idle academic to compile the data to confirm this thesis, but one thing's for sure: Last year was a lousy one for a lot of funds, and so this week we were treated to so many gloriously garrulous mea culpas that it would surely put a smile on the face of Pete Roget himself.

For sure, the old guard has seen better days. Nowhere was that more obvious than in the most important news event of the week: the debate. And by debate, of course, we're talking about the back-and-forth insult volley between hedge-fund scamp turned pharma scamp Martin Shkreli and rapper Ghostface Killah. It's hard to tell what Shkreli was thinking by making this threatening video seen on TMZ. Maybe it was just for the comedy, but it also makes one wonder if he may be attempting suicide by rapper.

What's uncomfortable, however, is that this brazen millennial poked at a generational sore spot surely being felt by us Gen Xers everywhere, whether it be trading rooms or newsrooms or rap rooms, when he told Mr. Killah:  "At the end of the day, I'm very sorry for you. You're an old man. You're an old man that's lost his relevance. And you're trying to reclaim the spotlight from my spotlight." Let's hope that when Shkreli gets past his current legal troubles he will get to work on a pill for those of us with Chronic Gen X Inadequacy Syndrome. 

In related news, Nishant Kumar brings surprising word from 2-and-20 land: Investors actually allocated $77 billion to hedge funds in 2015, more than double the amount in 2014. However, this too is more of a new-guard vs. old-guard story: The spotlight's shine was mostly on algorithm-driven strategies, not dusty old Graham & Dodd value hunting.

And that brings us back to the letters. The creative writing efforts on display were collectively so excellent that the Gadfly Trade of the Week could only go to Mr. Roget himself rather than any specific manager.  

Rough Year for the Old Guard
Some of the most-renowned stock-pickers in the hedge-fund world had a rough year in 2015.
Note: Baupost return is an approximation based on letter describing it as "mid-single-digit decline"


David Einhorn's Greenlight Capital was successfully able to correlate the fund's 20 percent slump to the poor showing in 2015 by Einhorn's favorite football team, the Green Bay Packers. He may want to make like Aaron Rodgers and do a "discount doublecheck" on some of those value stocks he loves, not to mention the decision to short both Amazon.com and Netflix.  As his letter said: "Even one of David's children suggested, 'Dad why don't you just short your longs and long your shorts?' If only it were that easy... ." 

Elsewhere, Yogi Berra was a go-to source for quotations to put in letters. From Global Return Asset Management (which actually posted a gain): "The future ain’t what it used to be.” From Seth Klarman's Baupost: “It’s déjà vu all over again.”

Klarman looks as if he might have gotten the most value out of his thesaurus, with an impressive collection of adjectives and adverbs to describe how hard value hunting was last year and explain a mid-single-digit decline: "2015 was a year of dodging relentlessly falling knives; upon deeper inspection, one superficially tempting investment after another turned out to be worse than they initially appeared." And a sentiment surely echoed by value hunters everywhere: "Momentum investing, a strategy that is based on following trends without regard to fundamental value, worked brilliantly in 2015 ... By contrast, bottom-up bargain hunting -- which requires fastidious research, endless patience, pattern-recognition skills derived from hard-won experience, and the application of sound judgment -- didn’t prove profitable for us last year."

Speaking of pattern-recognition skills, humility was a common theme in these letters. Bill Ackman expressed his humility by explaining that part of the reason Pershing Square lost money was because he's such a good stock picker that a bunch of copycats crowded into his trades and then all had to sell at once because of the plunge in one of his favorites, Valeant Pharmaceuticals International. 

The Ackman Reaction
Selling by investors who mimic Pershing Square's holdings may have exacerbated losses in the fund's portfolio, according to the fund's year-end letter.



Speaking of crowded trades, bemoaning the popularity of index funds has surely become a crowded trade among fund managers, but Ackman's rant is best in class and it's worth your time to read the whole thing, especially if you're an Ackman copycat looking for some boilerplate for your own letter. 

In short, many of these managers surely could have fall-back careers as financial columnists if the whole hedge-fund thing doesn't work out. (Note to them: Get off my lawn.)  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net