From All About Alpha, April 13, 2014:
What a Hedge Fund Failure Looks Like
The Twittersphere couldn’t get enough of the news last week that hedge fund legend Paul Tudor Jones was shutting down one of his eponymous funds, the Tudor Tensor Fund (try saying Tudor Tensor 10 times fast).
And critics of hedge funds will jump to the conclusion that it’s a dangerous world out there among alternative investments, and investors need to be careful because even a legend like Paul Tudor Jones can’t make money, having to shut down his futures fund. Some will throw around the term survivorship bias too, concluding that the indices composed of hedge fund returns won’t include this program moving forward as a way of saying the index over reports the performance of the asset class – never mind that the program is shutting down, that the Dow no longer includes buggy whip companies, either – or that the index still includes the past performance of the shuttered fund.
But just how bad was the Tensor performance that they decided to shut the fund down? What does a hedge fund ‘failure’ actually look like? The answer is, not that bad… Here’s a snapshot of just how the Tensor Fund has performed since inception, having returned a total of 42% over that time after running up 77%, then drawing down -20% over the last three years.
(Vami growth of 1,000; Disclaimer: Past performance is not necessarily indicative of future results)
The relative performance wasn’t all that bad either, with Tensor
outpacing their benchmark (managed futures) as well as the markets they
track (commodities) as well as a few little known asset classes called
Bonds and World Stocks.
The real story here isn’t really how this program performed or that Paul Tudor Jones can’t cut it in managed futures, the real story is the business side of the hedge fund business. I have no doubt that Tudor and their team believe this program will perform over the long-term and that this point likely marks a low for the model. But big hedge funds like Tudor know how the asset-gathering game works.Perhaps Monsieur et Madame would care to sample:
The Tensor Fund went from over $1 billion ($1.5 per our numbers) down to just $120 million over the last three years, and that is the reason the fund is closing, not anything to really do with performance, the skill of the manager, or expertise of the team. The closing of Tensor is more of a commentary on investors buying in at the top of a cycle and getting out at the bottom than anything else....MORE
