Hedge Funds Run Out of Investment Ideas
Wall Street's biggest loudmouths are apparently out of things to say.
On Monday, Bill Ackman, speaking at the Sohn Investment Conference, talked up Howard Hughes, a real estate developer he invested in six and a half years ago. He hasn't bought, or sold, a share of since. Ackman, who is also the chairman, acknowledged that Hughes was a not a new investment but said this was the first time he was talking about it publicly. Nope. Ackman yakked up Hughes in a Forbes cover story focused on Ackman's investment in the company in mid-2015. CNBC personality Jim Cramer tweeted during Ackman's presentation that it wasn't even the first time Ackman had brought up the stock at an investment conference.
Later in the afternoon, fellow hedge fund manager Larry Robbins came on stage wearing a Chicago Steel jersey (Robbins owns the hockey team) and took a jab at Ackman's seasoned investment pitch. "I figured I would try my best to be more self-promotional than Bill Ackman," he said.
But Ackman wasn't alone in his lack of originality. Altimeter Capital's Brad Gerstner said now was the time to buy shares of United Continental Holdings, a stock his hedge fund has held since 2011. Even Gerstner's investment presentation, which made no mention of the airline's current PR trouble, seemed dated. Josh Resnick of Jericho Capital said Frontier Communication Corp.'s track record of poor customer treatment made now a great time to short the stock. But perhaps not as great as five years ago, when Resnick began betting against telecom. The stock is down 60 percent since then.
Of the 10 hedge fund managers who talked at the Sohn, which according to a promotional video on the conference's website features the best investors in the world "delivering their latest investment ideas," half of them pitched stocks they have owned for years. And it's not just at investment conferences. In general, there's a growing mustiness coming from hedge fund portfolios. The epidemic of a lack of new ideas in hedge fund land is widespread.
According to a Goldman Sachs survey of 813 hedge funds with nearly $2 trillion in assets, the turnover in hedge fund portfolios hit a new low recently, having fallen pretty steadily for the past seven years. Portfolio turnover did rebound to 29 percent in the last three months of 2016, but that was still down from the mid-40s. Data for the first quarter won't come out until next week. What's more, Goldman said trading in the hedge funds' largest positions had dropped to 14 percent.
Hedge fund research firm Symmetric.io says the epidemic of no new ideas has been a problem for much of the post-financial crisis period, but it has been worsening recently. A little more than a quarter of the investments in the hedge funds it tracks were new in the third quarter of 2016, a low. That was down from more than a third at the end of 2013.
Hedge funds are up a little more than 3 percent this year through April, or about half the nearly 6.5 percent gain of the S&P 500 stock index since the beginning of the year, extending the so-called smart money's multiyear slump. So perhaps it's not surprising that performance has dropped when hedge funds seem out of ideas.
But here's the thing: Low turnover is generally seen as a good thing. It means you have more long-term winners that you want to keep than losers that you want to ditch. Buy-and-hold is the bedrock of investment advice. It lowers investment costs. Warren Buffett buys and holds. Low turnover is something that large pension funds and endowments look for when picking investment managers, which is the problem.
A few years ago, the hedge fund industry, in an effort to grow, switched from courting high net worth individuals, their traditional clients, to chasing the real big investors, namely pension funds, endowments and sovereign wealth funds. In return for their money, those big money investors want metrics. And while, as we all know, past performance isn't an indication of future returns, low turnover in connection with good performance might be, at least according to investment consultants.
Nonetheless, going from stock market gunslingers to investors who stick around appears to have taken a toll on hedge fund performance. That's a pretty good explanation for why hedge fund performance may not just be in a temporary slump, and why hedge fund conferences just aren't as exciting as they used to be.
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Stephen Gandel in New York at firstname.lastname@example.org
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