New year forecasts?
Hedge fund forecasts for the New Year.
1. The Dow, Nikkei, FTSE, DAX, TSX and BSE stock indices will go to 20,000 or 2,000 or in that range. Gold will trade between $2,000 and $200. My forecast for oil is somewhere from $200 to $20. The US dollar, Euro and Yen will devalue or might not.
2. Regardless of those precise predictions, vast sources of mispricings, inefficiencies, arbitrages and anomalies within and between asset classes and their derivatives will continue to be exploited by skilled hedge fund managers.
3. Just like Y2K back in 1999, a lot of time and money will be wasted on something that proves to be totally irrelevant and ineffectual - regulation of hedge funds. Professional investors already regulate hedge funds and fraud is illegal anyway.
4. After eliminating beta risk factor dependence, AVERAGE hedge fund returns will be low. Skill is rare; with 10,000 hedge funds the TYPICAL fund cannot be an alpha generator in the zero sum, alpha redistribution game. The BEST hedge funds will however produce much higher risk-adjusted returns.
5. The vested interests and mainstream media will continue to be hedge fund skeptics. Remember when the Internet was only for geeks and the entire global market for computers was estimated at five. Remember the Beatles couldn't get a recording contract, when Clint Eastwood couldn't get into movies and those who said the car would never replace the horse...
6. Pension fund underfunding will continue to be an important issue. Just think, if most plan sponsors had embraced quality hedge funds a decade ago they would now be overfunded. Coulda, woulda, shoulda. Steep drawdowns, the negative compounding and volatility from large long only equity allocations just kills funding levels over time.
7. For good, well-managed hedge funds, fees will be steady or ratchet UP. Plain vanilla fund of fund and other intermediary fees will continue down although there are many opportunities for value-added specialist services in these areas.
8. Lots of hedge funds will shut down. Apparently only 500 closed last year but I expect more this year. Some will go because of outstanding performance and the manager wants to retire. Some will close due to poor performance. Some just won't be able to take the stress and hard work and go back to the easier, relative return world. A few will be crooks. There will also be MANY start-ups to offset closures.
9. Someone, somewhere will completely screw up. It may be a big hedge fund or it may be a bulge bracket investment bank. But somebody big will be blown away by the markets and their mismanagement of risk.
10. Finally on a personal note, and like many other investors, I will make a positive absolute return in under any possible, even highly improbable, market conditions. Bear markets, bull markets, economic recession, hedge fund meltdowns, whatever. I've done all the stress tests and scenario analyses and fund strategy research you could ever do. No excuses; no "the market was difficult/challenging" or "the index was down 50% and I am only down 30% so I made you 20% alpha".
Many economists and strategists have been making predictions recently. Given their stunning accuracy and how intelligent they are at leveraging such clairvoyance, I hesitate to try to emulate such geniuses. I have with no idea where any market is going. But it will be interesting to see how the forecasts work out.
1. The Dow, Nikkei, FTSE, DAX, TSX and BSE stock indices will go to 20,000 or 2,000 or in that range. Gold will trade between $2,000 and $200. My forecast for oil is somewhere from $200 to $20. The US dollar, Euro and Yen will devalue or might not.
2. Regardless of those precise predictions, vast sources of mispricings, inefficiencies, arbitrages and anomalies within and between asset classes and their derivatives will continue to be exploited by skilled hedge fund managers.
3. Just like Y2K back in 1999, a lot of time and money will be wasted on something that proves to be totally irrelevant and ineffectual - regulation of hedge funds. Professional investors already regulate hedge funds and fraud is illegal anyway.
4. After eliminating beta risk factor dependence, AVERAGE hedge fund returns will be low. Skill is rare; with 10,000 hedge funds the TYPICAL fund cannot be an alpha generator in the zero sum, alpha redistribution game. The BEST hedge funds will however produce much higher risk-adjusted returns.
5. The vested interests and mainstream media will continue to be hedge fund skeptics. Remember when the Internet was only for geeks and the entire global market for computers was estimated at five. Remember the Beatles couldn't get a recording contract, when Clint Eastwood couldn't get into movies and those who said the car would never replace the horse...
6. Pension fund underfunding will continue to be an important issue. Just think, if most plan sponsors had embraced quality hedge funds a decade ago they would now be overfunded. Coulda, woulda, shoulda. Steep drawdowns, the negative compounding and volatility from large long only equity allocations just kills funding levels over time.
7. For good, well-managed hedge funds, fees will be steady or ratchet UP. Plain vanilla fund of fund and other intermediary fees will continue down although there are many opportunities for value-added specialist services in these areas.
8. Lots of hedge funds will shut down. Apparently only 500 closed last year but I expect more this year. Some will go because of outstanding performance and the manager wants to retire. Some will close due to poor performance. Some just won't be able to take the stress and hard work and go back to the easier, relative return world. A few will be crooks. There will also be MANY start-ups to offset closures.
9. Someone, somewhere will completely screw up. It may be a big hedge fund or it may be a bulge bracket investment bank. But somebody big will be blown away by the markets and their mismanagement of risk.
10. Finally on a personal note, and like many other investors, I will make a positive absolute return in under any possible, even highly improbable, market conditions. Bear markets, bull markets, economic recession, hedge fund meltdowns, whatever. I've done all the stress tests and scenario analyses and fund strategy research you could ever do. No excuses; no "the market was difficult/challenging" or "the index was down 50% and I am only down 30% so I made you 20% alpha".
Many economists and strategists have been making predictions recently. Given their stunning accuracy and how intelligent they are at leveraging such clairvoyance, I hesitate to try to emulate such geniuses. I have with no idea where any market is going. But it will be interesting to see how the forecasts work out.
© posted by Hedge Fund on 12:49 AM
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