The rumors we were reporting on the street about the Hedge Funds appear to be true. They have been unable to see time as so often the case and have been hit with the worst losses in Industry’s history since 2011. This may indeed contribute to what we see with the postponement of the Phase Transition being set in motion with the rush into bonds.
This is turning out to be the “Rich Man’s Panic of 2014” that has produced a bloodbath among many hedge funds who often trade-off of just opinion interspersed with fundamentals. This is shaping up to be perhaps the industry’s worst loss since late 2011 when then as well they could not see the change in trend.
The $2.8 trillion hedge-fund world has not proven to be great market timers. After all, it was Long-Term Capital Management that needed to be bailed out for its massive losses on Russian bet. They are often praised for going with the trend, yet wiped out when that trend shifts unable to see TIME. Far too many are simply fundamental traders rather than technical. They scour the surface looking for sure bets like takeovers and broad economic trends. This time, they were hit also unable to see the coming rise in volatility our models were warning about would begin in 2014 with September.
The losses came with the sharp sudden rise in volatility in stocks, bonds, currencies and commodities. The Wall Street Journal reported firms that were hit such as Jana Partners LLC, Discovery Capital Management LLC and Paulson & Co., all of which have posted losses ranging from 5% to 11% for the month. With retail participation at record lows, the market became a crowded affair with everyone on the same side. That has historically been a danger for any market.
The Wall Street Journal quoted one executive saying “An idyllic investment environment amid an improving economy…and then cue the music…dun-dun…dun-dun…dun-dun,” wrote Paul Westhead, chief executive of $4 billion fund Rimrock Capital Management LLC, in a letter to investors.
So where will fund managers go now? It appears they run into the arms of bonds. They appear to have a best one year before getting really wiped out on that one. Fr too many are just fundamental traders with inconsistent winning streaks that last for 3 to 4 years at a time.
Some funds were counter-trend plays and they made money into last week, However, such funds are typically the minority. It often takes real experience to know when to play counter-trend moves.
US 30 years Bonds back to 1798 – Dow Jones Industrials back to 1790
The crisis we face in all financial markets cannot be ascertained with models back-tested only a few decades. We need extensive databases to correlate human interaction when events unfold and how long do trends even last. We must explore the fourth dimension – TIME. This is where history counts. If we do not understand history, as Lady Thatcher said – we might be condemned to repeat its mistakes.
