Trimming The Hedge

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What's going on?

One of Sweden’s largest pension managers, AP3 – which looks after almost $40 billion of retirement funds – said it’ll be giving less of its cash to hedge funds because they haven’t 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. That’s 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, AP’s 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 it’s 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). It’s harder for hedge funds to succeed when markets are performing well overall (tweet this) – and we’re currently in a “bull market” approaching a decade in length. Facebook’s 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 it’s getting harder to generate attractive returns. That’s why they’re betting on private markets instead.

Originally posted as part of the Finimize daily email.

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