Changing Return/Risk

According to EurekaHedge, Hedge Fund launches are down 30% from the 2015-2016 average.  Nobody should be surprised by this … with Central Banks buying every AAA security they can get their hands on (less $50m per month in the US), investing gets pushed out the risk curve.  Pensions/401k providers can’t meet obligations with treasuries, so they move to muni bonds, and then to corporate bonds, and then to equities, and then to alternatives.  The greater the manager’s mandate for risk, the the more quickly he or she moves out that curve.

HF Ind Growth

I think the explanation here is twofold: 1) many start up Hedge Fund managers are closet index trackers (pro tip: don’t pay them 2/20).  It’s hard to convince me that you can start a new long only fund now, build an 18 month track record of alpha against the S&P 500, and market your way to a couple hundred million in AUM with equities hitting new highs everyday.  2) The more risk averse managers (pensions/401ks) are being pushed into the more exotic playpens where Hedge Funds usually play, inflating the value of those assets while the risks remain the same.   Hedge Funds generally employ the most risk accepting managers, but as the reward/risk metric shrinks even the most aggressive will wait for some type of pullback.

I don’t post this so that you feel bad for potential Hedge Fund managers.  It’s just a real world example of what happens when huge amounts of capital enter the marketplace and yields are compressed.  Eventually, the risks that used to primarily affect Hedge Funds become systemic risks that affect everybody.

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