(Bloomberg Opinion) -- In the “Peanuts” cartoon strip, Lucy persuades Charlie Brown to kick a football she’s holding, urging him to trust people. Then she snatches it away, sending Charlie sailing through the air as he cries, “She did it again!” If Charles M. Schultz had been capturing the finance industry, Lucy would manage a hedge fund; Charlie would be her hapless investor.
That’s my take on the news that a bunch of hedge funds that have suffered losses as the Covid-19 pandemic roils markets are seeking to raise fresh money, pitching it as the chance to get in on a once-in-a-lifetime opportunity. They include LMR Partners, Baupost Group, Citadel and Capital Four Management, my Bloomberg News colleagues Nishant Kumar and Hema Parmar reported earlier this week.
It’s easy to see why the funds want more chips to play with in the casino. The tables are getting wilder, with successive central bank and government interventions producing ever-wilder swings in equity and bond prices. Even the most dispassionate gambler can get swept up in the thrill of the pursuit of profit. And the hedge fund crowd is not exactly renowned for its shy, retiring personalities.
For funds that have already lost money, as the four above all did in the first two weeks of March, they have to claw back the losses on their existing cash piles before they can earn performance fees by improving performance. Fresh money would reset the bar, allowing them to share in more of the upside they expect — or claim — to be able to generate.
And there are undoubtedly opportunities in the market carnage. Billionaire Bill Ackman said this week his Pershing Square Capital Management firm has done “about the most bullish thing we’ve done,” investing $2.5 billion in equities in a “recovery bet” in recent weeks. “We are all long,” the activist investor said in a Bloomberg Television interview. “No shorts.”
In fixed income, Robeco, a Rotterdam-based fund manager with more than 170 billion euros ($183 billion) of assets that describes itself as pursuing a conservative investment style, reckons it’s time to buy corporate debt. “This is the big sell-off that we have been waiting for — for years,” Victor Verberk, co-head of the company’s credit team, said in an email earlier this week. “In just four weeks, valuations have collapsed to levels seen only four times in the last 80 years.”
But for hedge funds, which typically aim to be nimbler than their staid counterparts in asset management, the current market dislocations may, if anything, make it harder to get in and out of trades quickly and profitably. Trading in S&P 500 index futures, typically a way to hedge short-term equity investments, all but dried up in recent weeks. In U.S. government debt, it’s taken massive intervention by the Federal Reserve to stem a similar dysfunction between futures contracts, liquid Treasuries and their less actively traded off-the-run counterparts. All of this makes it less likely that what might have worked in the past for a particular hedge fund will bring success in the current environment.
Investing in a hedge fund is bound to have good times and bad times; clients have to be willing to accept there will be periods of losses, provided the performance over time is good enough to justify the fees. But it takes a certain amount of chutzpah to ask investors to increase their allocations to a losing strategy, even in normal financial times. As things stand, it’s outrageous.
Sure, there will be winners and losers among the hedge fund crowd. But identifying in advance which firms have the best compasses to navigate the current market storm profitably is impossible. It would take a special kind of optimism — the blind kind, perhaps — to throw good money after bad by investing in a hedge fund that has failed to distinguish itself so far in the prevailing maelstrom.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."
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