Active Managers Up, Hedge Fund Managers Out

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Congrats, active managers!

It is early yet but:

Through the end of April, U.S. stock mutual funds that are actively managed rose 2.25%, including dividends and expenses, according to research firm Morningstar Inc. Mutual funds that track various stock indexes were up 2.2% in the same period, while the S&P 500 gained 1.9%.

Also "nearly half" of active funds beat their benchmarks, "up from 21% for all of 2014." There are I think about three ways to view the active-passive competition:

  1. The Grossman-Stiglitz-ish view would be that as more money moves to passive funds, it will be easier for active managers to outperform, since there is less competition to find and make use of market-moving information.
  2. There is a somewhat paradoxical contrary view in which as more money moves to passive funds, only the best active funds will be left, so it will be hard for them to outperform each other and their relative performance will look worse.
  3. There is a cyclical view in which some market conditions are good for active management and some are bad, and sometimes it will outperform and sometimes it won't.

Here is Josh Brown last month on the third view, pointing out that current market conditions -- particularly good performance by international and small-cap stocks -- are relatively favorable for active management. 

Elsewhere in active management, Friday was 13F day, so here are 13F stories about AppleHerbalife, Pershing Square and Actavis, Trian and Mondelez, Paulson and Valeant, Berkshire Hathaway, Appaloosa, Greenlight, Soros, Berkshire Hathaway again and Third Point.

So long, hedge fund managers!

What's your model for this story about how some hedge fund managers are shutting down and returning money to investors, frustrated by "bothersome investors who make too many demands," increasing regulatory scrutiny, and "six long years of a bull stock market in the United States, and a coinciding six consecutive years of underperformance from the hedge fund industry"? Here's a model:

“If you have enough money and on top of that it’s a tough market and you don’t want to deal with investors asking about performance, you can take the high road and say, ‘Here’s your money back,’” said Steven Nadel, a hedge fund lawyer at Seward & Kissel.

Hmm yes the high road. One model could be that if you raise money after Period 1 of market crisis and hedge-fund outperformance, and then collect fees on it during Period 2 of bull markets and hedge-fund underperformance, then at the end of Period 2 you will have enough money (from the fees, and the bull markets) to pay for you to no longer have to answer questions about the underperformance, or try to fix it.

There are other models though; here's Gideon King of Loeb King Capital Management: "As the endless quest for becoming institutional continues on, the soul of investing might get lost, as the unmitigated compliance processes become cumbersome and interfere with the purity of speculative contemplation." Is that just whining about regulation, or does he mean it? Do successful hedge fund managers get into the business, and succeed, because of their deep joy in "the purity of speculative contemplation"? And once you have enough money, shouldn't you cast off the trappings of a hedge-fund business and contemplate speculation in the purity of your own money?

How's Europe doing?

"We’re striving for a mutually beneficial agreement by Friday," says a Greek spokesman, and how many Mondays have you read that? The story on Greece is pretty déjà vu all around: The spokesman continues "Our mandate from the Greek people is to reach an agreement where we stay in the euro area without harsh austerity measures," a German official says that a "third aid package for Athens is only possible if reforms are also implemented," analysts say that "It’s clear that time is running out," and there's even talk of a Greek referendum. (Here is Mohamed El-Erian on that idea.) There don't seem to be a ton of new ideas. There are new problems though. I mean, deposit flight isn't all that new a problem -- honestly how is there any money left in Greek banks by now? -- but it's increasingly taxing Greek banks' ability to use the European Central Bank's Emergency Liquidity Assistance program:

As deposits flee the financial system, lenders use collateral parked at the Greek central bank to tap more and more emergency liquidity every week. In a worst-case scenario, that lifeline will be maxed out within three weeks, pushing banks toward insolvency, some economists say.

And Greece apparently told the International Monetary Fund that it wouldn't be able to make a 750 million euro repayment last week without aid, though it eventually found the money. Maybe time really is running out on this problem and a stable and mutually agreeable solution will be reached this week? But probably not?

Meanwhile in France, "a comprehensive rewriting of French civil law – the first since the days of Napoleon I – could threaten the validity of almost every commercial contract signed in the country," which seems like not such a great idea? Though one French company that might want a do-over on some of its commercial contracts is Aviva France, which seems to be in a fight to the death with Max-Hervé George over its "cours connu" life insurance contracts; here's the latest, which involves George pestering Aviva to see how many other contracts like his it's issued.

How many $83 million bonuses does one man need?

I really enjoyed this profile of Jonathan Hoffman, the former Lehman Brothers bond trader who moved from Lehman to Barclays when Lehman went bankrupt in 2008, got an $83 million bonus from Barclays that year, and is now suing the Lehman estate for another $83 million bonus. Hoffman argues that he was promised $83 million from Lehman and that the $83 million he got from Barclays was an entirely unrelated bonus that just happens to have been for the same amount of money. Lehman argues: Come on. ("It is no coincidence that Mr. Hoffman asked Barclays for the very same amount he was owed," says the trustee's spokesman.)

So you've got a guy who made himself "tens of millions of dollars annually by placing bets that leveraged the massive balance sheets of" a now-bankrupt bank, and is suing for more tens of millions of dollars, and yet he comes across as sort of charming? Like, he worked hard, kept his head down, and made oceans of money for Lehman; now he just wants some of it back. When I mentioned this story last year I was very puzzled by his motivations, but this profile helps clear them up: It's the classic money-as-scorekeeping trader mentality, and Hoffman just seems to want appropriate credit for his accomplishments.

Elsewhere in, like, personal-grievance miscellanea, here's a very weird Hoover Institution post from Yale Law School professor Jonathan Macey about Lynn Tilton and Patriarch Partners:

In a just world, if the SEC found a company run by a lone woman that had saved tens of thousands of jobs and dozens of failing American businesses including Rand McNally, Stila Cosmetics, Dura Automotive, and MD Helicopters, it would give that company a medal. But not this SEC. This SEC is trying to put the company, Patriarch Partners, out of business, suing it for securities fraud on a theory that is both highly technical and specious. The SEC’s enforcement action potentially threatens tens of thousands of American manufacturing jobs at these companies.

I have mixed feelings about the SEC suit against Patriarch but I have to say that it never occurred to me that the SEC should give it a medal. I mean, for one thing: Patriarch's accounting really seems to have been not so hot. Also: The SEC doesn't really give out medals? Does it?

A little more Avon.

Given how easily and well last week's fake takeover bid for Avon Products worked, it's really rather important that regulators catch the people who did it, or this is going to start being an everyday occurrence. Why spoof markets by putting in risky executable orders on the wrong side when you can just lob in a fake takeover bid with no risk of getting caught, or of getting hit on the bid? So investigators are working on it: Apparently the bid was tracked to a company in the British Indian Ocean Territory, but at that point the trail runs cold, because there are no companies, or people, in the British Indian Ocean Territory. Hmm. Meanwhile my working theory of the Avon stock-price pop was that algorithms, and maybe casual momentum traders, were deceived, but here is a story about merger arbitrageurs being momentarily fooled. It doesn't sound like any of them actually bought stock though.

Things happen.

People are worried about bond market liquidity. Ben Bernanke: Warren-Vitter and the lender of last resort. Tobin's Q is high. Bank of America Merrill Lynch Opens Private Fund-Raising Arm for Start-Ups. Fannie, Freddie on Track to Issue Single Bond. Did the Financial Reforms of the Early 1990s Fail? The SEC is on Pinterest. Who is Satoshi Nakamoto? The signaling model of education. Mitt Romney Looked Very Goofy While Fighting Evander Holyfield. Hillary Clinton personally took money from companies that sought to influence her. "According to trading pros, there's still money to be made—and lessons to be learned—from 'Mad Men'-mentioned companies." Underwater tennis court. "Her father, Percy Duke, was said to have been the last man to wear a wing collar on the floor of the Stock Exchange and , for reasons which remain obscure, divided the world into people he called 'George,' and those he called 'McGregor.'"

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This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at

To contact the editor on this story:
Zara Kessler at