Falling Hedge Funds Confidence Causes Billion Dollar Runs 📉

🐺 Hi pack-mates,

This is Howling Markets, the newsletter manager that will not report any suboptimal information over the next decade!

Today we will be covering:

• Education: What Is the Equity Long/Short Hedge Fund Strategy? 🎯

• Retail Investors Are Jumping Back Into Cryptos 💸

• Falling Hedge Funds Confidence Causes Billion Dollar Runs 📉

• Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

What Are Equity Long/Short Hedge Fund Strategies?

We have often discussed hedge funds in relation to mutual funds and we have discovered how very little rules apply to the first type of investment pools.

The main reason behind this is the fact that they are often neither organized as mutual funds nor as public companies, and as a matter of fact, they might not even be companies at all!

In most cases, hedge funds are just limited partnerships made up by wealthy investors. As a consequence, they can choose among a plethora of different strategies and take on much more risk than what is allowed to mutual funds.

One of the earliest strategies ever applied by a hedge fund is the equity long/short strategy which consists in investing in stocks by opening both long and short positions, while maintaining a long-biased portfolio.

Despite being such a theoretically simple strategy, Equity L/S is one of the strategies that most highlights the abilities of the fund manager. Regardless of the market enviroment, the manager must be able to identify both overvalued and undervalued securities and then to find the best entry to initiate their strategy.

Usually, to find stocks fund managers adopt fundamental analysis and metrics such as price to earnings ratio, price to book ratio and many others. However, when they have to identify the precise moment to enter the market, they usually resort to technical analysis.

Retail Investors Are jumping Back Into Cryptos

Over the past years, especially after the pandemic, cryptocurrencies became really popular and experienced an explosive growth.

This is because governments all around the world, to ease the strains caused by the pandemic and its recession, offered stimulus checks and incentives to most households. In the cases in which this money wasn’t needed for any vital goods, people saw it as a “free” way to gamble in risky assets hoping for a big return. Naturally, cryptocurrencies were the first choice of most investors.

In just 18 months after the beginning of the pandemic, the capitalization of the cryptocurrency market skyrocketed from $160 billion to $2.7 trillion.

However, once the SPX peaked and most investors were fearing a bear market, the capitalization of the crypto market dropped back to $800 billion, following the principle that when investors sense potential adverse conditions, they will start liquidating their positions based on their riskiness.

Over the past months, the capitalization has continued to grow, signaling that investors believe that the current rally is pretty solid. How long do you believe the current rally will last before a short-term retracement?

Today’s Howling Question

And now, it is time for our howling question!

After discussing the significant outflow of resources over the past 10 years from L/S Equity Hedge Funds, which do you think has been their annualized rate of return over the past 5 years?

a) -2.3%

b)  -1.5%

c) +1.2%

d) +4.3%

e)  +7.2%

Try to answer the question by yourself, and then check the correct answer after the last interesting news!

Falling Hedge Funds Confidence Causes Billion Dollar Runs

Hedge funds were seen as the pinnacle of financial performance, the best of the best only reserved for sophisticated and wealthy investors.

To this date, investing in a hedge fund is still as hard as it was back in the day, considering that the average minimum investment across the industry is $1 million. However, they might be starting to lose their appeal.

Over the past decade, L/S Equity hedge funds have underperformed the wider market 9 out of 10 years. As a result, an individual who would have invested $100 dollars in a hedge fund, would have had on average $163, while an S&P 500 investor would have had $310.

If instead we shrink our time frame to just the past 12 months, the S&P 500 managed to gain +19.77%, while, on average, L/S Equity funds only gained +7.54%.

Because of this, L/S Equity funds have experienced a decrease in AUM of more than $720 billion in just two years due to 23 consecutive months of asset outflows.

Some experts believe that, at first, the extremely low interest rate environment helped weak companies stay in the market, reducing the effectiveness of the funds’ short positions. Then, the current explanation is that the market returns are more closely tied to the Feds’ announcements rather than the actual companies’ earnings, explaining their suboptimal performance.

Do you believe that in the future these unique investment vehicles will make a comeback?

Equity and Debt Markets Update

And now, our daily markets update!

Today was characterized by the Q4 earnings announcement of many important companies, and most of them reported better than expected results. This fueled a powerful SPX jump that lounged +1% higher, almost reaching the $5,000 target, stopping just short of it by 11 cents.

After this intraday rally, the price slightly came down during the end of the session, closing the day up +0.82%.

On the other hand, today has been the exact opposite for the 10 year government bond yield. The price moved sideways throughout the training session, jumping higher during the first hours before coming slightly back down. In the end, the US10Y closed +0.51%.

Answer

The correct answer is e) +7.2%

Considering that tracking the performance of the hedge funds is a particularly difficult task due to their private aspect, the Hedge Fund Research (HFR), a database for everything related to Hedge Funds, has decided to create some indexes to track the performance of these investment vehicles.

According to the HFRI 500 Equity Long/Short Index, the annualized return over the past 5 years has been +7.24% for this specific type of hedge fund.

Howl-Worthy Memes 😂

🐺 See you next time!

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