Hedge Funds Dissolve a la 2009
The struggling hedge fund industry is adding its negative notch to the gloomy global economic picture.
Bloomberg’s calling it today – Wednesday, April 27:
The $2.9 trillion hedge fund industry had the worst start to a year in returns and outflows in at least seven years. Alan Howard’s Brevan Howard Asset Management and Paul Tudor Jones’ Tudor Investment Corp. are among the firms that clients are pulling billions of dollars from, while managers including Bill Ackman and John Paulson have posted steep losses.
Hedge funds lost 1.9 percent in the first quarter, according to Hedge Fund Research’s global index, the poorest performance since 2008. The industry had net outflows of $16.6 billion in the last two quarters, the most since 2009, according to HFR. In 2015, 979 funds closed, more than any year since 2009, according to the research firm.
The bad news flows in Bloomberg’s article “Loeb’s Third Point Says Hedge Funds in ‘Catastrophic’ Period”. The piece quotes a quarterly letter from Third Point, a hedger founded by Dan Loeb. The New York-based firm flatly tells clients: “There is no doubt that we are in the first innings of a washout in hedge funds and certain strategies.” It goes on to describe the financial environment as “a hedge fund killing field.”
We reviewed the decaying economic picture in January following Davos, stating in our Peculiar Progressive column “Oligarchs, Central Banks, and Our Sinking Economy” for The Clyde Fitch Report:
Reports from Davos showed much talk about four major areas of concern in the global economy: (1) the “volatility” of the Chinese economy; (2) plunging stock markets; (3) sinking oil prices, and (4) debt crisis in the emerging markets, led by BRICS (Brazil, Russia, India, China, and South Africa).
Peculiar Progressive, however, sees global private and public debt as the real, long-term problem, spurred by the world’s central banks colluding to hold interest rates down. For example, Jim Rickards, author of the books Currency Wars and The Death of Money, complained in 2014 that the Federal Reserve’s zero interest rates had led to a transfer of $500 billion from American savers to Wall Street banks. That, along with decades of stagnant incomes and recent lack of full-time employment for U.S. workers, has led to dependence on credit to make ends meet, and the dissolution of the middle class.
We also worried recently, on the Ides of March, in our reality column on subprime auto loans headlined “Does Crash Near in Subprime Auto Loans Market?”. We noted in that column how subprime car loans have been increasing while payment defaults have been mounting. Also, efforts are growing to bundle the loans into derivatives, considered a primary cause for the 2008 global economic meltdown.
Also catching our attention this week: An Equifax National Consumer Credit Trends Report citing “new first mortgages originated in 2015 was $1.82 trillion, which represents a 42.9% increase over 2014’s total of $1.27 trillion.” That sounds good until you see later in housingwire.com’s report how subprime mortgages enter the frame:
According to Equifax’s report, the total balance of new first mortgages originated to subprime borrowers was $59.7 billion in 2015, an increase of 41.3% over 2014.
Equifax’s report also showed that there were more than 366,900 loans originated to subprime borrowers, which represents an increase 25.2%.
While the lending to subprime borrowers increased, it still remained a very small portion of the total amount of mortgage lending.
In terms of the dollar amount, the amount loaned to subprime borrowers represented just 3.28% of the total. And in terms of the number of mortgages, the subprime amount was 4.76% of the total number of mortgages originated in 2015.
The report notes the percentage of subprime mortgages is small. But keep in mind that Wall Street loves to combine subprimes into derivative securities, like before the 2008 meltdown. While Wall Street’s doing the same type bundling with subprime auto loans, subprime credit cards, and the $1.2 trillion student loan market.
Viewing the spread of these old greedy practices, along with worrisome reports of the global growth in private and public debt — and now dissolution in hedge funds — where does it look like were headed to you?
Still we like to end with a positive solution. We offered one in this March 11 column: “This is the Economic Plan All Candidates Need”. Why not read it and take it to your presidential and Congressional candidates?