Dinakar Singh Says Hedge Funds Need to Stop Trading So Much
Dinakar Singh Says Hedge Funds Need to Stop Trading So Much
(Bloomberg) -- Dinakar Singh has a simple explanation for why hedge funds keep trailing the stock market: They trade too often.
Instead of sticking with high-conviction bets, managers have become prisoners to the short term. If a position doesn’t make money fast enough or loses too much too soon, they close it out.
“There are plenty of very, very intelligent people up and down Wall Street working at funds,” Singh, the founder and co-chief executive officer of Axon Capital, said in a “Bloomberg Front Row” interview. “The problem isn’t that their brains somehow shrunk, the problem is their risk tolerance shrunk.”
Singh, a former top trader at Goldman Sachs Group Inc., started his New York-based firm in a more freewheeling era. With private equity firm TPG as a partner, TPG-Axon Capital Management became one of the largest funds employing an equity long-short strategy. Assets mushroomed to $13 billion in 2007 from an initial $2.8 billion in 2005 and Singh, feeling flush, expanded to London, Hong Kong and Tokyo.
But his performance slumped and the partnership dissolved. Singh, 51, rebooted the firm without TPG two years ago and since has concentrated his portfolio in 10 to 15 long and short positions, trading infrequently. Axon returned 17% in 2019, and in the first half of this year gained 24% while the Bloomberg Equity Hedge Fund Index lost 5.2%. Assets stand at about $500 million.
Singh’s long wagers include Facebook Inc., Alphabet Inc. and health insurer Centene Corp. His highest-conviction investment is Indian lender HDFC Bank Ltd., whose shares fell 11% this year through Thursday.
Too many managers buy stocks to meet quarterly performance goals, not because they’re fundamentally cheap, he said. That’s why they often fail to pounce on mispricings when markets turn volatile.
Though he admires the business success of multi-strategy “pod shops” like Millennium Management and Citadel, Singh said their strict risk limits on traders can make outsize returns elusive.
“The amount of money that has flooded into the hands of people or business models that are structurally challenging to invest in is very high,” he said.
It’s easy to dismiss such complaints as bitterness. After all, Singh stumbled in the 2008 financial crisis and never regained his mojo. Clients pulled billions of dollars. Stars Eric Mandelblatt and Hari Kumar left.
Yet Singh isn’t alone in questioning the industry’s model. Investors withdrew more money from long-short funds in 2019 than any other strategy. Lansdowne Partners shut its flagship fund after losing 23% in the first half. Sloane Robinson is winding down.
Singh said he had to rediscover how to make money in a market now dominated by “sheep” such as quantitative funds and day traders blindly following prices up or down.
“The hedge funds are no longer the wolves,” he said.
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