Trimming The Hedge

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What's going on?

One of Swedens largest pension managers, AP3 which looks after almost $40 billion of retirement funds said itll be giving less of its cash to hedge funds because they havent done a good enough job.

What does this mean?

According to AP3, hedge funds investors who buy and short things including stocks, bonds, currencies and commodities (like copper and oil) in a bid to generate better returns than the market average have made 2% a year for the last fifteen years. Thats only 1% more than AP3 would have made if it bought US government bonds over the same period. And, partly because of the high fees some hedge funds charge for managing money, APs now giving them an even smaller pot of gold to look after.

Why should I care?

For markets: Hedge funds time in the sun tends to be when its stormy for other investors.


Hedge funds invest by taking a view on individual assets relative to the overall market. For instance, a hedge fund might own Facebook stock but not buy stocks of the group of companies investors typically associate with it (i.e. its index). Its harder for hedge funds to succeed when markets are performing well overall (tweet this) and were currently in a bull market approaching a decade in length. Facebooks stock is up 30% in the last year, while its index is up 25%. This might be a good return for a hedge fund, but it could have been even better if we were in a recession, and the overall market was up by less.



The bigger picture: Private equity investing is so hot right now.


Recently, investors have been giving record levels of cash to investment managers like private equity and venture capitalists. As valuations of public companies continue to rise sometimes to record highs some investors believe its getting harder to generate attractive returns. Thats why theyre betting on private markets instead.

Originally posted as part of the Finimize daily email.

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