Why the Smart Money is Dumb

Bloomberg’s out with a piece today showing the results from Credit Suisse’s “periodic survey of hedge fund investor sentiment.”

The headline you’ll be reading is that 84% of respondents redeemed from hedge funds in the first half of 2016. Wow, seems like a lot, until you read that only 9% don’t intend to re-deploy into hedge funds. So are they redeeming in the first place? They’ve got that covered in the below graphic, and it all boils down to that characteristic usually put onto “retail” traders – performance chasing.

Pie Chart Institutional Investors Redemptions

62% of respondents redeemed because of performance related reasons, either with specific funds (53%) or the portfolio in general (9%).  Here’s Bloomberg’s expanded look (it’s like they have a graphics department or something. 😉

Bloomberg Hedge Funds Allocation

Is this a Dumb move?

It seems none of these investors read Ben Carlson’s telling post on the so called “smart money” chasing performance. In his words:

“Institutional investors are more than happy to chase performance — to their detriment — again and again.”

Hire Fire of Institutional Investment Management

This chart shows how institutional investment committees continually make their investment manager decisions based on past performance, only to be disappointed by the subsequent returns once they invest. They hired managers that outperformed and fired managers that underperformed only to see those roles reverse after their investment moves were made.

The “smart” money has a nasty habit of buying winning funds after they’ve just won and selling losing funds after they’ve just lost. It’s something of an anti-value, anti-momentum approach where these large funds are always one step behind and fighting the last war.

There are plenty of great portfolio managers out there. But there probably aren’t enough asset allocators or organizations who can discern when to invest with a great portfolio manager and when it’s time to move on. This process is made even more difficult when a large committee has to come together to make group decisions.

So be careful next time you read about big fund of funds, family offices, pensions, or the like exiting a hedge fund. It’s probably not a sell signal on that fund at all. Of course past performance is not necessarily indicative of future results, but It’s probably a buy signal, given all investments proclivity to cycle between good and bad performance, and seemingly all investors habit of getting in at the highs and out at the lows.

One comment

  1. I love the way you show all the post. Anyway good post.Thumbs up !!!!

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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