The Remarkable Resurrection Of Hedge Funds

The recovery has really begun to lift all ships when the hedge fund industry can claim that it has risen almost instantly from the death that it suffered in the final quarter of last year. The FT reports that outflows from funds in that quarter were $152 billion. Hundreds of funds went out of business or into hibernation as a result of client desertions. Many experts who follow the money management industry assumed that clients would not return for years because the losses they had suffered were so monstrous.

The quarter that just ended was one in which much of the bad fortune of hedge funds was reversed. Hedge Fund Research told the FT that assets under management rose $142 billion. Overall,  performance of funds was the best it has been in 10 years.

There is a temptation to say that hedge fund managers got some of their skills back and that attests for the stunning improvement. What the industry has avoided advertising is that the S&P 500 rose from 676 in mid-March to 923 on July 1. A monkey throwing darts should have matched the 36% return in the index over that period.

The exciting performance has caused people who forecast hedge fund investments to assume that clients and potential clients will pour tens of billions of more dollars into these investment vehicles over the next quarter. That will undoubtedly happen as caution gives way to greed, the normal course of things after a huge market sell-off and partial rebound. Investors cannot stand missing the last train to the big party.

It will only be a big party if the market can run back up to where the S&P was two years ago at 1,200.  This would mean that almost all of the money that evaporated in the collapse of equities would have returned, magically, in a short period of time. The magic may be as simple as funds that moved into cash and Treasuries choosing to reenter circulation, along with a certain amount of asset inflation as the value of real estate and other widely held property stops falling.

The improvement in the prospects of hedge funds is a reminder of how short the memories of investors can be. March was as bad a month as most investors had experienced in a generation or longer.  March is only a little over 100 days gone.

The risk that the market cannot go up much from here is rising. That is old news and something which is said by market analysts and economist every day. Their concerns do not seem to matter much. The broad indices are higher by over 6% during the last month. Each day that the market is supposed to pull back and catch its breath, it rises again. Strong results from Apple (AAPL) and Starbucks (SBUX) are likely to overheat trading again. Earnings season is still in a relatively early stage. The chances for optimists to focus on more possibly good news could continue into the beginning of August.

Earnings may not be adequate to advance the market another 20%, but July unemployment numbers are only two weeks away. Job losses under 300,000 for the month could cause a frenzy of buying, no matter that 10% of Americans will be out of work. Hedge funds are for making money. Suffering is for those who are broke.

Douglas A. McIntyre