Would you like to know how many times Investment &
Technology published a story including the word ‘after-tax’ in 2007?
I’ll tell you anyway. 29.
And how many do you reckon we’ll run in 2009? This editorial could
well be it.
One fundie recently cheered themselves up by reminding me that
such were the losses harvested in 2008, they can “churn as hard as they want to
for the next couple of years and it won’t make any difference” to the capital
gains tax outcome for clients.
In the monumental reshuffling of the world’s financial order that
we’ve been, er, ‘lucky’ enough to witness over the past six months, after-tax
funds management is one of the concepts that’s suddenly been relegated to the
bottom of the deck.
A whole lot of marketing effort and hot air has bitten the dust
along with it, although as job losses in the industry continue to mount, few
would rank that waste among their top concerns right now.
Hedge funds, meanwhile, would appear to be another of those
According to Chicago-based Hedge Fund Research, the hedgies have
seen their aggregate funds under management plummet from a peak of US$2
trillion to less than US$1.4 trillion, on the back of depressingly
market-linked returns and a chaotic rush of redemptions – a gobsmacking US$152
billion in the last three months of 2008 alone.
But whereas the spruikers of CGT efficiency face a seemingly
intractable problem – no gains – some in the hedge fund community say the
sector will grow stronger from its near-death experience, as those offerings
loaded up with traditional market beta are weaned out.
This phenomenon has been tracked by AQR Capital Management, which
admittedly has a vested interest in that it recently began running a series of
low-cost ‘hedge fund beta’ offerings, which seek to simplistically replicate
the essence of the nine major hedge fund strategies, not trying to add alpha
but at the same time hedging out all traditional beta.
AQR has found that during October and November last year, the
risks taken by the hedge fund community around leverage, credit flow and liquidity
– all exposures which lie outside ‘pure’ alpha-generating approaches and which
in bull markets are isolated problems – all suddenly turned into one problem
and sunk the vast majority of funds.
In both those months, AQR’s hedge fund beta strategies actually
made money, while the index of aggregate manager performance was down more
than 6 per cent both months – with negative traditional beta driving the
Just as K-Mart recently revealed the comeback in 2008 of lay-by –
that almost-forgotten concept where a consumer doesn’t actually receive their
goods if it turns out they can’t afford them – hedge funds will benefit by being
forced back to basics this year.
And for the truly skilful ones, an extension of the financials
shorting ban shouldn’t make any difference.