Financial Times: The Hedge Fund Fee Structure Consumes 80% of Alpha

Investors bear the risks and managers reap the rewards, says Beachhead’s Andrew Beer. The average hedge fund earns 1.67 per cent in management fees and is paid 18 per cent of investment profits annually. Over the past ten years, investors paid away half of pre-fee returns. Even more troubling is the fact that fees consumed 80 per cent of alpha, the active return on an investment. Yes, the industry still generates a lot of alpha, but it goes to the managers, not investors. How did we end up in a world where investors bear the risks and managers reap the …

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Smart Money Insights: Weekly Brief June 14

10 Days Until Brexit? In an earlier post, we explored the potential fallout of a Brexit and the shifting fortunes of the Leave camp. A new poll gives Leave a 19 point advantage (52% vs 33%), while UK bookmakers are pricing in a somewhat lower chance of Brexit—approximately 40%. Bookmakers are continuously revising upwards their estimates of a Brexit and bookmaker William Hill indicated in an interview with Business Insider that Leave could overtake Remain in betting by the weekend. Meanwhile, a new report from Morgan Stanley forecasts a -15% drop in European equities and a -7.8% drop in the …

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Why a ‘Replication’ Strategy Trumps Liquid Alt Funds

Catch Andrew Beer interviewed on TheStreet. The liquid alternatives movement is trying to bring hedge fund strategies to ordinary investors. Unfortunately, performance has been subpar for the majority of liquid alternative funds and the fees are still relatively high compared to the average mutual fund. Andrew Beer, managing partner at Beachhead Capital Management, said a ‘replication strategy’ is the better option. ‘The idea is simple: figure out how hedge funds are invested, and copy it,’ said Beer, who also refers to his replication strategy as ‘Dynamic Beta’. Beer said even for sophisticated investors, it is difficult to figure out exactly …

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Brexit in 10 Days?

A new poll from the Bruges Group gives the Leave camp a 19 point lead over Remain. According to the poll, 52% of respondents supported a Brexit, while only 33% wished to remain in the EU and 15% were undecided. A decisive victory for Leave is within grasp; even if all of the undecided Britons voted to Remain (an unlikely outcome), Leave would still come out ahead. Adding to the confusion, UK bookmakers are pricing in a substantially lower risk of a Brexit; for instance, bookmakers Ladbrokes and Coral are pricing in a 36% chance of a Brexit. Given the …

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Valeant: Position Crowding, Intrinsic Value – an Update

In January, we wrote a post on Position Crowding and Valeant – the poster child in 2015 for a crowded hedge fund name.  One of the points we made was that “intrinsic value” can be highly uncertain when it’s based on forecasts of earnings and cash flow.  We expanded on this when we wrote about how value investing had changed – from asset based analysis that (still, generally) underpins the Value factor to the concept of “private market value” (see Is Warren Buffett a Value Investor? and Why Apple is Not a Top Ten Holding of 93% of Hedge Funds).  …

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Smart Money Insights: Weekly Brief June 7

Pay to Lend Fitch Ratings recently highlighted that global negative yielding sovereign debt topped $10.4 trillion in May, an increase of $500 million from the prior month. Much of the increase was driven by yield declines in additional maturities of Japanese and Italian sovereign bonds. In Japan, quantitative easing and negative interest rates instituted by the Bank of Japan have contributed to negative sovereign yields. In Europe, weak inflation and manufacturing data along with an expansion of the ECB’s economic stimulus program have contributed to the negative yields. 17 Days until Brexit? Last week, we explored possible explanations for a …

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Brexit in 22 Days?

A new Guardian poll reveals a 52 – 48 split among Britons in favor of leaving the EU. The alarming result represents a sharp decline in support for the Remain camp, which held a comfortable ten point lead as recently as mid-May. Commentators attribute Remain’s reversal of fortune to a combination of heated rhetoric surrounding the migrant crisis and a growing skepticism among Britons that a Brexit would negatively impact their personal finances. A recent survey by UK research group Ipsos Mori revealed that 58% percent of respondents believed their standard of living would be unaffected, while a further 9% …

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Smart Money Insights: Weekly Brief May 31

Welcome back after the holiday weekend. Last week we revisited some recent dire predictions that have faded from the headlines. This week, we’ll focus on a single issue — value vs growth stocks – since this is having a big impact on active investors of all stripes. The catalyst is that value-focused ETFs have had inflows of $5.5 billion this year while growth ETFs have seen outflows – causing some to forecast a reversal of the growth-chasing trend over the past several years. Key points follow below. Value Has Performed Terribly vs. Growth There’s a good article today in Bloomberg …

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Smart Money Insights: Weekly Brief May 24

It’s time to revisit some of the big macro risks over the past year.  The risks of $10 oil, a recession in 2016, a sudden devaluation by China, Brexit and a renewed Grexit crisis all appear contained – see below.  If we’d polled readers in January about where the equity markets would be by Memorial Day if those five risks had all subsided in the second quarter, the answer most likely would not have been “flat to down YTD.”  But here we are.  Perhaps the markets are shifting to concerns about more rapid Fed rate hikes or the rise of …

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Smart Money Insights: Weekly Brief May 17

We’re picking up again after a lull due to intensive work on a webinar and several research topics.  First, despite a flat S&P year-to-date, active managers are having one of the worst years on record.  Second, we may be at the tipping point for hedge fund fees – long overdue and a validation of what we’ve been shouting from the rooftops for years.  Third, the equity market recovery seems to be driven by short covering – not a stable foundation.  We are working on several research projects, which will show up as dedicated blog posts.  If there are any specific …

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