The profits that got away

Merryn Somerset Webb mulls on the similarities between salmon fishing and managing a hedge fund

We are fishing in Scotland. Every evening we gather after a day on the river to give and listen to the various excuses being made for the lack of fish at the table.

The water is too high; the water is too low; it's been raining; it hasn't been raining; the air pressure is wrong; the ghillie was drunk; and so on. But nowhere in this parade of self-justification does anyone admit to being not much good at casting or not having the faintest ability to see into the mind of a spawning salmon and to fish accordingly.

Remind you of anything? Hedge-fund managers perhaps?

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They did not as a group do too badly in 2009 (the Eurekahedge Fund Index suggests an average return of 20%). But the fact that they did OK in a year when all markets soared tells us nothing of their skills. What they've done so far this year does and it isn't encouraging.

The Eurekahedge index has the average fund falling 2.6% in May and 0.5% in June. That makes it the fourth-worst first-half since 1987, says Hennessee Group. The Absolute Return sector, named so as to suggest some sense of security and regular guaranteed return, has been just as useless. In 2010 so far the average fund has returned just 0.1%. That almost benign number provides cover for some really dismal performance.

The Octopus UK Absolute Return Fund has lost over 19% this year, despite its "aim to deliver a positive return in all stockmarket conditions". Citywire numbers show that absolute return funds from the likes of UBS and RAB have fallen over 30% in the last three years. To me, all this suggests the vast majority of Absolute Return fund managers should retire immediately, admitting along the way that they understand today's global markets no better than the rest of us.

They, on the other hand, just think that the environment hasn't been quite right. There's too much volatility. There is not enough volatility. There is too much correlation. There's too much political interference. There is not enough stimulus. There is not enough liquidity. Low interest rates are distorting the market. China is growing too fast. China is growing too slowly. And so on.

This year has brought a very difficult environment with it, but that doesn't mean these excuses are good enough. Hedge and Absolute Return fund managers have marketed themselves as being capable of producing positive returns regardless of the environment something they, as a group, clearly can't do. Yet as part of the ongoing pretence that they can, they charge ludicrously high fees still 1.5%-2% in management fees and 20% odd in performance fees. I've no idea why, even after the failures of the last few years, investors still tolerate the existence of so many funds apparently designed to do nothing but rip them off.

Whether I eat any salmon this week has little bearing on my financial future (or yours). Unfortunately, the high fee, low performance nature of our investment industry very probably will.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.