The World’s Smartest Investors Can’t Figure Out The Markets – And That’s A Really Bad Thing

Hedge fund managers sit at the top of the financial world’s food chain. They’re generally seen as the smartest money managers, and their companies have the most flexibility to pursue new opportunities. The result is supposed to be the best possible returns – for clients who can afford the high fees.

But lately things haven’t worked out that way. Hedge fund managers appear baffled by the behavior of stocks, bonds and pretty much everything else, as time-tested strategies fail and brand-name managers report terrible results, in a growing number of cases throwing in the towel, returning their investors’ money and riding off into the sunset.

To take one of many recent examples, Cerrano Capital LLC, according to the Wall Street Journal “a $700 million hedge fund backed by some of the industry’s biggest names,” announced its closure after less than a year in business. Its initial results were lackluster and the manager reportedly tired of the cold reception he received from potential investors.

A higher-profile mess is David Einhorn’s Greenlight Capital, which through August of this year was down 25% versus an 8.5% gain for the boring old S&P 500 – an index that can be owned via ETFs for vanishingly low fees.

Then came October’s brutal takedown of tech and finance stocks, which you’d think would provide both vindication and quick profits for the hedge funds that had previously lost big by ignoring and/or shorting those obviously-overpriced sectors.

But no. It turns out that most hedge funds had given up on the traditional long/short hedge-your-bets approach and simply piled into the hottest momentum plays, getting crushed when those stocks finally tanked. Some notable casualties:

Daniel Loeb’s Third Point down 6%, or roughly $1 billion in October.
Tiger Global Management down 9.4%
Soroban Capital Partners 9%
Glenview Capital Management 11%
Melvin Capital Management 15%