Hedge funds, widely regarded as the Rock Spiders of the funds management industry, took a well-deserved pounding yesterday.
Rather than contribute capital to equity markets, hedge funds often use contrarian tactics like short selling to generate returns.
In a declining market, making money from shorting is like shooting ducks in a barrel, or poking fun at Brenton Best. Get it wrong though, and watch the losses magnify.
I rather suspect the hedge funds didn’t pick yesterday’s bounce. When the buying started at 11.20am, there was real panic. Massive short positions needed to be covered, and with a gain of 7 per cent from the trough, many were too late.
So they ended up selling low and buying back high. The pain will be real.
Many lazier investment managers (including Tasmania’s own RBF and most industry funds) like an exposure to hedge funds. They’ve been conned by asset consultants into thinking hedge funds are an asset class.
When members see the underlying performance of their portfolios in coming months, there will be wailing and gnashing of teeth. Equities, international funds and hedge funds will all show negative returns. The only positive asset class at the moment is bonds, with many bond funds booking returns above 11 per cent for the financial year just finished. Sinking US yields will add further gains since balance date.
Reporting season has started, and so far, results look good, but it’ll take a while for that optimism to transfer into market gains.
