The end of an era for hedge funds

More than 1,000 hedge funds shut down last year – the most since the financial crisis. There are now fewer funds around than at any time since 2013. What’s going on?


Eric Mindich is closing his hedge fund, Eton Park Capital Management
(Image credit: 2010 Bloomberg)

Is this another flashing warning sign?

This week, a $7bn hedge fund shut down. Eton Park, run by Goldman Sachs child prodigy Eric Mindich (at the tender age of 27, he became the youngest partner in Goldman history), launched in 2004, with $3.5bn under management, one of the largest such launched ever at the time.

But it's had a rough time, particularly since 2009. The fund lost 9% last year in a year in which the US S&P 500 returned nearly 12% (including dividends). That's a really awful underperformance. So far this year, according to the Wall Street Journal, the fund is flat, versus a gain of around 5% for the S&P.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

It's a big name, but hardly the only casualty. More than 1,000 funds shut down last year the most since the 2008 financial crisis and there are now fewer funds around than at any time since 2013. A grand total of 8,326, according to data group HFR.

What's going on?

I can't help but think that it's interesting that hedge funds in many ways, sold as the ultimate in "active" investing, and certainly among the most expensive ways to invest out there are in decline just as passive investing in ultracheap funds is really taking off in a serious way.

Hedge funds have presented themselves as being victims of easy monetary policy and central bank money printing. In effect, trades based on what "should" happen have been disrupted and reversed by the intervention from on high by the likes of Janet Yellen and chums.

Meanwhile, others argue that passive funds have benefited greatly from this environment. In effect, the "dumb" money has done well while the "smart" money has struggled. "Beta" has been given an easier ride than "alpha".

I think this is rather a self-serving way to look at things (surprise, surprise). If your investment strategy is based on "big picture" events ("macro", in the jargon) and timing the market, and yet it doesn't attempt to take the actions of central banks and politicians into account, you shouldn't be in the "macro" business.

All the same, the closing down of this particular fund and the accelerating popularity of passive exchange-traded funds is another sign of the sort of "fin de sicle"-type shifts you often see near a top. You could also argue that it's populism that has blindsided the hedge funds (as it has the markets). Could this be a sign that we're hitting a peak of some sort?

As I said earlier in the week, the tricky thing about turning points is that you don't get any alarm bells going off that tell you exactly when to sell. But it's clear that conditions are ripe for a shift.

Keep an eye on the US jobs market

The initial jobless claims data measures how many people are claiming out of work benefits in the US. It comes out weekly. It's been going down for most of the time since 2009, and is now hovering around its lowest levels for years.

One thing about jobless claims, says Rosenberg, is that it's worth keeping an eye out for turning points. And last week, claims jumped quite significantly rising by 15,000 to 258,000. Also, the four-week moving average looks as though it "hit its cyclical trough on February 25th."

If that's correct, then it could be a big deal. You see, "lows in jobless claims are a classic late-cycle development. Just as when claims are hitting their peaks and everyone laments that the bad times are never going to end, well, those actually are the times when you want to start dipping more toes into the equity pool."

To be precise, the S&P 500, on average "peaks 14 weeks after the bottom in the four-week moving average in claims". And then, after 57 weeks, a recession starts.

Hmm. If we're looking at 14 weeks from 25 February 25, that's around about the end of May, early June for the market to peak. "Sell in May", right enough.

I think I'll add this to our list of "key charts" to watch.

This high street giant is worth looking at



Until recently, it's looked like a falling knife a stock more liable to cut your fingers off than rebound in a rewarding manner. But the results this week were encouraging. Not because they were good, but because it sounded like the chief executive Simon Wolfson has got a handle on what's gone wrong.

He also made a proper attempt to discuss the issue of bricks and mortar' retailing and its decline - stress testing the property portfolio to figure out how much of a liability its store estate could turn out to be. The good news on that front is that the company's "lease structure is such that the portfolio could be managed down profitable".

The share price rebounded by 9% on the day. I reckon it's hit a turning point now. I haven't bought in myself yet but I am tempted to. I'd suggest that if you've had your eye on it, now's the time to be investigating further.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.