☀️☕️ The Rise, Fall and Rise of Hedge Funds

📊 Also: Three cuts from Jay’s Fed; BOJ hikes, Yen drops; Samsung HBM; PDD and Temu sales up 123% 🎓️ Hedge Funds

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📈 Market Roundup [21-March-24]

US large-cap S&P 500 closed 0.89% UP ▲

Tech-heavy Nasdaq Composite closed 1.25% UP ▲

Pan European STOXX Europe 600 closed 0% DOWN 🔻

HK/China's Hang Seng Index closed 0.08% UP ▲

Japan's broad TOPIX closed for public holiday

📝 Focus

  • The rise, fall and rise of hedge funds: why platforms have sparked a revival

📊 In the Markets

  • Three cuts from Jay’s Fed; BOJ hikes, Yen drops; Samsung HBM

  • PDD and Temu sales up 123%

📖 MoneyFitt Explains

  • 🎓️ Hedge Funds

💸 Personal Finance Corner

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Investors are taking notice, and here’s why: 

1) They raised $1.9M+ from 2,000+ investors, including founders with $100M+ exits, VCs, angels, executives from Google and Amazon, and more.

2) They grew to over 8 million users in just 15 months. 

3) They are riding a $15.7 trillion wave of AI innovation.

📝 Focus

Even while actively managed funds have been resolutely trounced by the passive investing industry both in terms of performance as well as growth and assets under management, one pocket of active management has stood out: Hedge Funds🎓. [MFM: Passives >> Actives; Active Fundpocalypse?]

The rise, fall and rise of hedge funds: why platforms have sparked a revival

Hedge funds have been around for 70 years, but the story everyone likes to tell is of how George Soros’ hedge fund made $1bn in a single day in the 1980s, shorting the GBP. The 1980s marked the rise (and glory days) of the first generation of superstar hedge fund managers – that included Soros, Paul Tudor Jones and Julian Robertson (of Tiger fame). 

Though the Global Financial Crisis (GFC) created a new slate of hedge fund stars – such as John Paulson and others who famously shorted the bubbly US housing market (and were celebrated in the book, The Big Short), the decade following the GFC saw a major decline in the hedge fund industry as the period of free money made it harder for them to distinguish themselves. Many hedge funds shut their doors for good or their founders converted them into their family offices (including both Soros and John Paulson). In fact, hedge fund assets peaked in 2007 (at US$2.3tn) and it would be 2016 before they reached those lofty heights again (chart below). 

Global hedge funds: Assets under management, 1997-2023 (US$bn)

Source: Statista

However, the last few years have seen the rise of hedge funds again (assets reached US$5.1tn in 2023), but this has been driven (mostly) by a new model of hedge funds – the so-called multi-strategy platform funds (which alone manage about US$360bn of assets). The success of this new model has revived the fortunes of the industry and has seen many older funds rebrand themselves as such platforms. Still, there are three that sit at the apex of the industry now: Point 72 (the new-ish avatar of the fund founded by Steve Cohen), Millennium Management (founded by Israel “Izzy” Englander) and the OG platform and grand-daddy of the sector, Ken Griffin’s Citadel. 

Citadel, which now manages US$60bn, returned 15.3% in its flagship fund. The average U.S. hedge fund returned 7.5% last year, according to research firm HFR. So, hedge fund returns are decent but hardly stellar when compared to the S&P’s 26% returns (including dividends) last year.

There are several key reasons for their success: multi-strategy platforms reduce the “key-man” risk of personality-driven hedge funds. They are laser-focused on risk management by ruthlessly cutting managers who lose money. By employing several strategies across the overall portfolio, they claim to have returns that are uncorrelated with the market.

Hedgin’s been good. You? - Image credit: Mike and Dave Need Wedding Dates (2016) / 20th Century Fox via Tenor

Writer: Rajeev R. Das of Das Kapital is a former MD at Goldman Sachs and spent two decades in Asian equities research. He was most recently an advisor to a major Asian sovereign wealth fund. This article is for information only and not investment advice. The writer may have long or short positions in the companies mentioned above. All opinions are his and his alone. Please see the important disclaimer at the bottom.

🇸🇬 Singapore: Let’s Get MoneyFitt!

📊 In the Markets

US markets took off and hit new highs again as the Federal Reserve signalled its intention to cut interest rates by three-quarters of a percentage point this year, despite recent inflationary pressures, even as it unanimously decided to maintain rates at a 23-year high at its latest rate-setting meeting.

Alongside this decision, the central bank sharply revised up its forecast for US economic growth to 2.1% for this year from the previous projection of 1.4% while expecting slightly higher core inflation at 2.6% from 2.4%. Notably, the unemployment forecast was trimmed from 4.1% to 4.0%.

“Job gains have remained strong, and the unemployment rate has remained low”

The Federal Open Market Committee (acknowledging its dual mandate of managing jobs as well as inflation)

This suggests that the Fed could initiate rate cuts as early as the summer, potentially leading to a decline in borrowing costs and mortgage rates, which had surged in previous months. Such a move may influence economic conditions and sentiment leading up to the presidential election in November.

Asia-Pacific markets rose as investors absorbed the Bank of Japan's watershed monetary policy shift and awaited the U.S. Federal Reserve's interest rate decision. Japan's stock markets were closed for the Vernal Equinox holiday but with FX still trading, the yen weakened further against the dollar as the BOJ decision was to end negative rates but hold off on subsequent increases.

Yen weakness, however, was probably as much or even more from dollar strength as traders speculated on whether the Fed would signal two rate cuts in 2024 rather than the three markets have been pricing in (it didn’t!) [MFM: NIRP and ZIRP are Dead! EARN interest on ¥Deposits?!; End Game for the ¥ Carry Trade?]

The People’s Bank of China maintained its one- and five-year loan prime rates at 3.45% and 3.95%, respectively. These are the main benchmark rates used for business and household loans and mortgages. 

South Korea’s Kospi surged 1.28% to 2,690.14, buoyed by a 5.63% jump in Samsung Electronics when Nvidia reportedly said the chipmaker’s high bandwidth memory (HBM) chips were in the “qualifying” stage for use in its GPUs. This sent rival SK Hynix tumbling as HBM was one of the few times in living memory that the firm has built any kind of lead over its giant compatriot rival. Samsung also said it expected over $100 million in sales from its advanced chip-packaging products this year and was aiming to increase the profit share of its memory chip unit.

PDD and Temu sales up 123%

Ultra-cheap shopping site Temu’s owner PDD Holdings reported a 123% jump in revenues to Rmb89bn ($12bn) for the three months to December, hailing 2023 as a “pivotal” year, with net profits up 146% to Rmb23bn. Temu was only launched in the US in late 2022 and quickly rolled out to Europe and Asia, and already threatens established players like Amazon and even Shein with its knockdown prices.

Running, Number 1, Sun and Energy (R1SE) on PDD - Image credit: Tenor

In China, Pinduoduo differentiates itself by leveraging social networking and group buying dynamics to offer discounted prices to consumers. It encourages users to invite friends and family to join group purchases, leading to lower prices through bulk buying. Pinduoduo also incorporates elements of gamification to grab market share from Alibaba’s Taobao (individual sellers and small businesses) and Tmall (larger brands and retailers.) 

Despite the looming threat of US restrictions on Chinese internet companies like TikTok and Temu and Shein’s use of a tax loophole, and amid allegations of forced labour in its supply chain, the Nasdaq-listed PDD rose 3.5%, taking it to a 67% gain in the last 12 months in stark contrast to Alibaba’s 11% drop.

📖 MoneyFitt Explains

🎓️ Hedge Funds

A hedge fund is a type of investment fund that pools capital from multiple investors, much like mutual funds do, but because they use various complex strategies to generate returns, they are typically only available to accredited investors (i.e. rich folks) and not regulated like traditional investment vehicles.

The term "hedge fund" originally referred to managers "hedging" or protecting the portfolio in case they are wrong or against something unexpected, but it's now just an umbrella term and there are many different strategies and styles (often not involving "hedging" at all.)

Many of them lock up investor (“Limited Partner”) money for relatively long periods of time and charge high fees, such as "2-and-20", meaning an annual management fee of 2% of assets plus a 20% share of all gains made in the portfolio. This rewards, on purpose, either long-term thinking or a high-risk / high-return investing mindset.

Hedge funds are usually run by highly experienced investment managers who use sophisticated investment tools, such as short selling, quant strategies and derivatives, to generate returns. Increasingly, the biggest hedge funds are multi-manager platforms running with strict risk and performance controls. 

One common element is the use of leverage, borrowing money to increase the size of their investments, which can amplify returns but also increases risk if the trades go wrong. (Using derivatives like options creates leverage, too, without explicit "borrowing.")

One of the benefits of hedge funds is that they have the potential to generate high returns, which can be especially attractive to investors looking for ways to either turbocharge, hedge or diversify their portfolios (or all of the above.) On the downside, hedge funds can be highly risky, partly due to the leverage taken.

💸 Personal Finance Corner

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