Is this the Knockout Blow for Hedge Funds?

This week the world lost an incredible sportsman in Muhammad Ali. Love him or hate him he was arguably ‘The Greatest’. He certainly called himself that, but his record speaks for itself.

At 22 he won his first World Heavyweight Championship. He would finish his career with a record of 56 wins (37 by KO) and just five losses. That gives him an incredible 91.8% win ratio.

I personally think he was the greatest boxer of all time. And considering his longevity and talent, perhaps one of the greatest athletes of all time.

Imagine if you could replicate Ali’s boxing win ratio in stock picking? Imagine if 91.8% of the time the stocks you invested in were winners? I’d go so far as to say that you might end up as ‘The Greatest’ of the investing world.

The reality is just like Ali, when it comes to winning and losing, no one wins 100% of the time (unless you’re Floyd Mayweather Junior — but that’s a conversation over a few beers, not a Money Morning article).

When it comes to investing you simply can’t get every stock pick right all the time. I know this firsthand. In Australian Small Cap Investigator I try to find the best small-cap stocks on the ASX. Companies that fly under the radar, yet develop to be incredibly exciting and have the potential for investors to double, triple, or ‘ten-bag’ their money.

And I don’t always get it right. For example, last week I put out sell recommendations on six stocks; BWP Trust [ASX:BWP], FAR Ltd [ASX:FAR], Collins Foods Ltd [ASX:CKF], oOh!Media [ASX:OML], Yellow Brick Road [ASX:YBR], and 3P Learning [ASX:3PL].

Now here’s transparency for you: Yellow Brick Road was down 63% and 3P Learning down 67%. That’s right, two of them were big losers. They stunk it up. They were the ‘Sonny Liston’ of the buy list.

The other four were up 140%, 163.3%, 210.4% and 103.4% respectively (OML made its 103.4% in just nine months). These were my champions. These were the stocks that more than make up for the losses.

Now I’m not trying to blow my own trumpet here. The point is — and I’m the first to admit it — I don’t always get it right 100% of the time. But this is proof that there are plenty of big returns to made in the market.

How often do you get that kind of honesty in investment advice? When was the last time your hedge fund said, ‘hey look I got this wrong,’ and copped the backlash for it? More often than not a hedge fund will just ignore what’s really going on and pretend that everything is hunky dory.

Hedge funds — the knockout blow

The truth is, the party’s over for hedge funds. Up until 2008 they rode a wave of roaring equities markets and easy debt. They leveraged up, multiplied wins, covered losses with debt, and built a reputation as 100% winners.

But as we know, no one wins 100% of the time. Since 2008, hedge funds have bled money. Investors are waking up to the dubious performance and are withdrawing hedge fund money at an alarming rate.

Fortune Magazine reports that,

‘…according to a team of JPMorgan analysts led by Nikolaos Panigirtzoglou, hedge funders should brace for a total outflow of at least $25 billion this year.’

This level of outflows rivals that of 2009 and even The Great Depression. Fortune also explains that, ‘In the first three months of 2016 hedge funds as a group lost .67% in returns. In 2015, returns fell 1.12%.

That’s pretty poor. Let’s not forget these hedge fund managers usually clip 1–2% of fund’s net assets. Then they’ll often charge as high as 20% performance fees too (assuming they perform).

As an industry hedge funds manage around US$2.7 trillion worth of assets. That’s around US$54 billion in management fees floating around the system at any given time.

According to the ‘Alternative Industry Management Association’ the hedge fund industry employs around 100,000 people directly. Now I’m all for people being paid well for high output, exceptional performance and appropriate value. But considering the outflows from the hedge fund industry their poor performance and excessive management fees…well you’d have to be a fool to have money invested in a hedge fund.

You get better performance with ETFs or even cash.

Of course there’s an alternative benefit to ‘hedgies’ being paid excessively. They generate a lot of tax collection. Needless to say, many of them probably have equally-excessively paid ‘creative’ accountants to help minimise that tax bill. But that’s not their fault; it’s the tax system’s.

Anyway, the point here is the hedge fund industry relies on just one thing to stay alive. Clients. That means clients like you. But as I said before, if you’re still investing in hedge funds you’ve got rocks in your head.

The good news is people like you are smart enough to their game. That’s why people are pulling out their money at record levels. People are realising you can get better returns elsewhere for less cost. That could be cash or small-cap stocks you can buy and sell yourself.

I see this as the knockout blow for hedge funds. When you can get better returns in cash than a hedge fund, why bother with the hedge fund?

This will lead to the day when there are no more clients for hedgies. And that means no more hedge funds to rort the investment game.

With a dire future ahead, what is a ‘hedgie’ to do? Well going by an email I got in my inbox a couple of days ago, they may as well knock each other out.

$4,150 for a hedgie slap-fight

Friday week the palatial Conrad Hotel in Hong Kong (where the Presidential Suite is an oh-so-reasonable $7,000 a night) is hosting the ‘Hedge Fund Fight Nite 2016’.

Billed as ‘a premier networking event for the finance industry’ the, ‘Hedge Fund Fight Nite 2016 will be going back to traditions with a luxurious hotel venue.

You can secure a 12-person table at the event for $4,150, if you like. But the real draw is the fight card. You get ‘hedgies’ from UBS, PWC, JIA Group, Nomura and BNY Mellon (and others) knocking each other out.

This is management money well spent. From your account to their fund, and from their pockets to $4,150 tables at a charity event to see other ‘hedgies’ dancing about a ring in a slap fight.

To me this is another example of the ridiculous nature of the hedge fund industry. And another reason why you should steer well clear.

Needless to say, your editor won’t be attending this event. Although I would be happy to see hedgies knocking each other around for a change, rather than their clients’ investment money.


Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

He’s not interested in boring blue chip stocks. He’s after explosive investments; companies whose shares trade for cents on the dollar, cryptocurrencies that can deliver life-changing returns. He looks for the ‘edge of the bell curve’ opportunities that are often shunned by those in the financial services industry.

If you’d like to learn about the specific investments Sam is recommending in either small-cap stocks or cryptocurrencies, take a 30-day trial of his small-cap investment advisory Australian Small-Cap Investigator here, or a 30-day trial of his industry leading cryptocurrency service, Sam Volkering’s Secret Crypto Network here.

But that’s not where Sam’s talents end. Sam specialises in finding new, cutting edge tech and translating that research into how the future will look — and where the opportunities lie. It’s his job to trawl the world to find, analyse, research and recommend investments in the world’s most revolutionary companies.

He recommends the best ones he finds in his premium investment service, Revolutionary Tech Investor. Sam goes to the lengths of the globe and works 24/7 to get these opportunities to you before the mainstream catches on. Click here to take a 30-day no-obligation trial of Revolutionary Tech Investor today.

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