Hedge fund pros squeezed by rally
Peter Siris (is a New York hedge fund manager.) / Daily News
The smart guys, who run the big hedge funds, are all massively underinvested. They have lots of cash, think stocks are overvalued, the economy is lousy, and optimism among investors is way too high.
They've made money the past three years by having limited exposure or even being short the market. So they keep going with what has worked for them. People and institutions with money to invest like this strategy - seeking funds that make money in all markets. One person told me he didn't care about performance. He only wanted funds with limited market exposure and low volatility.
Now here's the problem. The funds that have performed the best, and hence have attracted the most money, have bet against the market. Over the past three years, this has been a great bet. But are these fund managers geniuses, or is this their 15 minutes of fame?
Wall Street runs in cycles. Four years ago, the geniuses were the ones investing in tech and Internet stocks, and all the money was flowing into their funds. In March 2000, everyone wanted "new economy" managers. But as the market peaked, their fame turned to infamy.
Many of today's hedge funds have only been in business a few years. Their managers proved they can outperform a bear market, but haven't proved they can do well in a sustained rally.
These funds, however, are very performance driven. They get paid only if they do well. If they underperform, the fast money will leave them as quickly as it left the Internet funds. They also have high overheads - big rents, salaries and houses. Many can't afford a lousy year.
But most are having one now. For the year, the Dow is up 6.1%. The S&P is up 9.5%, and the Nasdaq has gained 19.5%. Many funds are doing worse than the market. This isn't good for them. Investors are willing to pay 20% fees for funds that make money in down markets or dramatically outperform up markets. They aren't willing to pay big fees for lousy performance.
Meanwhile, the market continues to act strong. Stocks may be expensive, but other investments, such as bonds or money market funds, are less attractive.
We could see a correction. The market has had a decent move, and it is due for a pullback. A decline of 3% to 5% wouldn't surprise me. But, if the correction does not come soon, hedge fund managers could panic. They could rush to put money to work.
Fast money can't afford to lose, and right now, a lot of fast-money players are well behind the market. If they capitulate, the market could melt up. Watch the technical action of the market in the next few weeks. If it keeps going up on strong volume and down on weak volume, we could see a huge upside rally.
Originally published on June 2, 2003 |
