The grass is greener on this side of the hedge

18:20, Mar 03 2013
Illustration: John Shakespeare

You don't often hear the term "guru" these days. I guess it's because we're all more sceptical about any one person's ability to have the right answers all the time.

At university I followed the teachings and experiences of several investment gurus, with Warren Buffett being the favourite because his approach just made sense.

I was also intrigued by George Soros, largely because his mode of investing was so different - hedge funds and currency plays - and always on an enormous scale.

He started a hedge fund in 1970 that achieved more than a 4000 per cent return over a 10-year period. Then, in the nineties, Soros became famous when he short-sold £10 billion, profiting from the Bank of England's unwillingness to raise interest rates or float its currency. As the pound fell in value, Soros earned an estimated US$1.1 billion profit for his efforts and was later known as "the man who broke the Bank of England".

When I think hedge funds, I think of Soros and clever, gutsy and lucrative strategies that often only make sense after the event. I was therefore interested to read Soros' comments recently where he said that hedge funds had changed irrevocably since his time and can no longer outperform the sharemarket.

Was it a case of having made all his money, he can diss his competitors? Or did he have a case?


Interestingly, he has been joined by others (including fellow guru Buffett) who believe the glory days of hedge funds are over.

Soros' logic is that, as the hedge fund industry has grown so large (several thousand managers overseeing a US$2 trillion industry), hedge funds are having more of an influence on the market, taking less risky bets, and becoming undifferentiated. Gone are the swashbuckling "hedgies" from yesteryear, and gone are their typical clients also.

Nowadays, the clients of hedge funds are just as likely to be large pension and sovereign funds that seek to lower their volatility rather than boost returns.

Hedge funds are increasingly looking like "normal" managed funds, both in their composition and in their returns, making it very difficult to justify their higher-than-normal fee structure.

Soros says that typical hedge fund fees of 2 per cent per annum plus 20 per cent of profits over a set level (known as two and 20) eat into profits when returns are low, as they are in this post-crisis environment. When hedge fund returns were 15 to 20 per cent per annum, the 2 per cent fee didn't make too much of a dent, but now that they are lower - the average hedge fund returned just 6.2 per cent in 2012 according to Hedge Fund Research - the fees leave a bigger hole.

Another contributing factor to the changing fortunes of hedge funds is the increased influence of politicians on financial markets. Nowadays markets and currencies move swiftly and significantly on announcements from politicians and central banks, easily catching out a hedge fund on the wrong side of a trade.

Not all hedge funds are outdated or expensive, and perhaps a new generation of gurus will emerge. But for now hedgies look in dire need of water.

Carmel Fisher is managing director of Fisher Funds, an investment manager and KiwiSaver provider.

Sunday Star Times