Hedge Fund Gurus Struggle With Low Returns, Criticize Industry

Published on GuruFocus.com on May 10, 2016

Returns so far this year for hedge fund managers have been lacking amid stagnant U.S. growth and struggling economies in Asia. At the annual Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) shareholder meeting on April 30, Warren Buffett criticized the high fees at many hedge funds and the high pay given to managers for subpar performance.

“Our two managers at Berkshire (Todd Combs and Ted Weschler) each manage $9 billion,” Buffett said at the shareholder meeting. “They would get $100 million each at a hedge fund just for breathing. The compensation scheme at hedge funds is unbelievable.”

Then on May 2 while speaking at the Milken Institute Global Conference, Steven Cohen of Point72 Asset Management said he was “blown away” by the lack of talent in the business, and the firm narrows down its hiring to about 2% to 4% of candidates they’re interested in.

Dan Loeb of Third Point struck a similar chord in his first quarter commentary, writing that this is one of the most catastrophic periods of hedge fund performance since his fund’s inception. The Third Point Offshore Fund lost 2.3% year to date while the Standard & Poor’s 500 gained 1.3%. Loeb said the factors contributing to underperformance were investors crowding into short trades in the renminbi and companies sensitive to the Chinese economy, remaining long in the FANG stocks and moving into market neutral stocks in the fourth quarter.

Other gurus have not been immune to the industry struggles. The Gabelli ABC Fund returned 0.8% in the first quarter, underperforming the 3.4% return of the S&P Long-Only Merger Arbitrage Index. In the first quarter commentary, Mario Gabelli and the fund managers wrote that U.S.-centered M&A fell by about 38% while European deals have reached a five-year high. Deals in the Industrials and Materials sectors had the highest volume while health care, though it had record-breaking activity in 2015, was down 53% year over year.

David Einhorn and Bill Ackman of Greenlight Capital and Pershing Square have perhaps made the biggest news recently due to downturns in their respective large holdings in SunEdison (SUNE) and Valeant Pharmaceuticals (NYSE:VRX). After suffering a painful 20% loss last year, Greenlight’s portfolio managed to beat the S&P 500 in the first quarter with a 2.5% return.

Einhorn unloaded about three-quarters of his SunEdison stake on April 15, which had fallen into the penny stock category. The solar energy company’s trouble included a failed merger and lawsuits and has since been moved to the OTC market trading under the SUNEQ symbol. The stock was priced at 21 cents as of Monday afternoon.

Valeant may need even less introduction, as the pharmaceutical company has dominated headlines since late last year as the stock began its downward trend to lose more than 80% of its value. Ackman initiated his position in the stock during the first quarter of 2015 for an average of $176.38 per share. Today the stock trades at $28.07 after facing scrutiny for its business practice of acquiring drugs and hiking the prices. Ackman has been called to testify before a Senate subcommittee regarding his investment and has since joined Valeant’s board in an attempt to turn the company around. Time will tell whether his investment of time and money will pay off.

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