Key Takeaways
- • Donald A. Steinbrugge, CFA, Managing Partner of Agecroft Partners, argues in Hedgeweek that the negative public perception of hedge funds is largely unfounded, citing that most of the estimated 15,000+ hedge funds are run by honest managers.
- • Agecroft estimates the industry manages roughly USD3 trillion and generates about USD90 billion in revenue from management and performance fees, assuming a 1.5% management fee, 20% performance fee and 7% net return.
- • HFR estimates investors allocated USD76.4 billion of new capital to hedge funds globally in 2014, with industry assets near all-time highs.
- • Steinbrugge contends hedge funds provide liquidity, small-business financing, more than 250,000 North American jobs (direct and indirect), and charitable support such as USD132 million to 210 NYC poverty programs from the Robin Hood Foundation.
- • The article cites AIMA research that hedge funds outperformed the S&P 500 and MSCI World on a risk-adjusted basis, and notes the average volatility of hedge fund indices is a little more than half that of equity indices.
Summary
In a Hedgeweek opinion piece dated March 2015, Donald A. Steinbrugge, CFA, Managing Partner of Agecroft Partners, argues that the hedge fund industry's poor public reputation is not supported by the facts. He attributes the perception to the fact that most hedge funds cannot market themselves to the general public and to what he describes as negative media coverage that portrays managers as dishonest, funds as highly risky, and performance and fees as poor.
On honesty, Steinbrugge states that Agecroft estimates more than 15,000 hedge funds operate globally, the vast majority run by managers acting in their clients' interests. He argues that far more investor money has been lost to fraud in public equities and fixed income, citing Enron, WorldCom, Tyco International and HealthSouth, and questions why hedge fund presentations carry extensive disclosures while public stock purchases do not. On risk, he notes that the average volatility of hedge fund indices is a little more than half that of equity indices, and that the MSCI World index fell more than 40% in 2008, roughly double the decline of the average hedge fund. He also points to 2008 declines of 90% to 100% in shares of Bank of America, Lehman Brothers and Merrill Lynch, and says institutions are increasing hedge fund allocations to reduce portfolio volatility and gain low correlation to other asset classes.
On societal benefit, Steinbrugge argues that hedge funds have become an important source of liquidity since Dodd-Frank constrained investment banks, acting as buyers of securities others will not purchase. He says hedge funds provide direct loans and equity to small and mid-sized companies that struggle to obtain bank financing, and that the industry employs high-paying staff, with Agecroft estimating more than 250,000 people in North America employed directly or indirectly. He estimates the industry's roughly USD3 trillion in assets generates approximately USD90 billion in revenue, much of it taxed as salaries and profits. He also cites charitable giving, including USD132 million given last year by the Robin Hood Foundation, which was created by hedge fund managers, to 210 poverty-fighting programs in New York City.
On performance and fees, Steinbrugge cites HFR data showing USD76.4 billion of new hedge fund capital in 2014, and AIMA research reporting that hedge funds outperformed the S&P 500, MSCI World and Barclays Global Aggregate ex-USD Index on a risk-adjusted basis, including during the 2009-2013 rally. He acknowledges the industry is not perfect, but argues that regulators oversee it and that negative coverage is unfairly extrapolated across the industry. The piece is an opinion by a industry participant and should be read in that context.
On honesty, Steinbrugge states that Agecroft estimates more than 15,000 hedge funds operate globally, the vast majority run by managers acting in their clients' interests. He argues that far more investor money has been lost to fraud in public equities and fixed income, citing Enron, WorldCom, Tyco International and HealthSouth, and questions why hedge fund presentations carry extensive disclosures while public stock purchases do not. On risk, he notes that the average volatility of hedge fund indices is a little more than half that of equity indices, and that the MSCI World index fell more than 40% in 2008, roughly double the decline of the average hedge fund. He also points to 2008 declines of 90% to 100% in shares of Bank of America, Lehman Brothers and Merrill Lynch, and says institutions are increasing hedge fund allocations to reduce portfolio volatility and gain low correlation to other asset classes.
On societal benefit, Steinbrugge argues that hedge funds have become an important source of liquidity since Dodd-Frank constrained investment banks, acting as buyers of securities others will not purchase. He says hedge funds provide direct loans and equity to small and mid-sized companies that struggle to obtain bank financing, and that the industry employs high-paying staff, with Agecroft estimating more than 250,000 people in North America employed directly or indirectly. He estimates the industry's roughly USD3 trillion in assets generates approximately USD90 billion in revenue, much of it taxed as salaries and profits. He also cites charitable giving, including USD132 million given last year by the Robin Hood Foundation, which was created by hedge fund managers, to 210 poverty-fighting programs in New York City.
On performance and fees, Steinbrugge cites HFR data showing USD76.4 billion of new hedge fund capital in 2014, and AIMA research reporting that hedge funds outperformed the S&P 500, MSCI World and Barclays Global Aggregate ex-USD Index on a risk-adjusted basis, including during the 2009-2013 rally. He acknowledges the industry is not perfect, but argues that regulators oversee it and that negative coverage is unfairly extrapolated across the industry. The piece is an opinion by a industry participant and should be read in that context.
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