Friday, December 2, 2011

"Hedge Funds: The New Dumb Money "

Following up on Wednesday's "It's All in the Timing: Hedge Funds Were Dumping Stock Right Up to the Start of Our One Week 750-DJIA-Point Rally (DIA; SPY)"

MadHedgeFundTrader via Resource Investor:
Much of the fury in Wednesday’s nearly 500 point “melt up” in the Dow was generated by hedge funds panicking to cover shorts. Convinced of the imminent collapse of Europe, the impotence of governments, and the death spiral in sovereign bonds, many managers were running a maximum short position at the Monday opening, and for the umpteenth time, were forced to cover at a loss. Meet the new dumb money: hedge funds.

When I first started on Wall Street in the seventies, you heard a lot about the “dumb money.” This was a referral to the low end retail investors who bought the research, hook-line-and-sinker, loyally subscribed to every IPO, religiously bought every top, and sold every bottom.

Needless to say, such clients didn’t survive very long, and retail stock brokerage evolved into a volume business, endlessly seeking to replace outgoing suckers with new ones. When one asked “Where are the customers’ yachts”, everyone in the industry knew the grim answer.

Since the popping of the dot-com boom in 2000, the individual investor has finally started to smarten up. They bailed en masse from equities, seeking to plow their fortunes into real estate, which everyone knew never went down. Since 2008, the exit from equities has accelerated. There have been over $400 billion in redemptions of equity mutual funds, compared to $800 billion in purchases of bond funds.

Although I don’t have the hard data to back it, I bet the average individual investor is outperforming the average hedge fund in 2011. With such heavy weightings of bonds and cash, how could it be otherwise. While the current yields are miniscule, the capital gains have to be humongous this year, with yields plunging from 4% to 2%.

This takes me back to the Golden Age of hedge funds during the 1980’s. For a start, you could count the number of active funds on your fingers and toes, and we all knew each other. The usual suspects included the owl like Soros, the bombastic Robertson, steely cool Tudor-Jones, the nefarious Bacon, the complicated Steinhart, of course, myself, and a handful of others....MORE
On a related subject last week the most popular post at Market Beat was:
Hedge Funds Kiss Their Alpha Goodbye