Dissecting Hedge Funds

Blessed with the genius of hindsight, Veryan Allen has decreed that "the recent stat arb problems were almost inevitable". He's talking about the losses in quant funds at places like Goldman Sachs, Renaissance, and DE Shaw, and his reasons all ring true to me.

Interestingly, however, Allen's departing a little from his usual script. Normally, when a hedge fund loses money, he says that it's not a proper hedge fund at all. This time around, he's saying that "contagion affects all strategies," and that "everyone loses money sometimes".

And he's also moved decidedly into the bearish camp, it would seem. Yes, there are opportunities in this market – you can hardly have this much volatility without creating opportunities for the fast and the smart. But the rest of us, he says, should sell, now.

Good fund managers are taking action and reducing risk during this storm. I find this stay in for the long haul, ride out the volatility "advice" ludicrous. Ships do their best to get to the nearest port and aeroplanes avoid hurricanes but sell-side strategists are mostly recommending staying invested and they claim stocks are "cheap"!
If you can't or won't invest in good hedge funds or go short, the safe haven is CASH. It is not as though "common sense" traditional stock and bond funds are immune from all this. There has been little selling by long only and long biased funds so far but if it comes the effects will be worse... Dig your well before you are thirsty and DEFINITELY before everyone else gets thirsty.thirsty for the safety of cash.

Allen even lifts his kimono a tiny bit and gives us the name of one hedge fund he considers to be a good investment:

Renaissance Technologies remains the best quant firm currently operating. It is worth noting that their core fund Medallion is positive for this year and is where the managers keep their own money.

On the other hand, never mind 2-and-20; Medallion charges 5-and-44, even if you're invited to invest in it, which you're not. As Greg Newton notes, "Medallion is today a purely 'friends and family' operation, managing the assets of Renaissance employees, former employees, and their families".

Maybe that cash is looking more attractive after all, at least with overnight interest rates still relatively high.