Alternative thinking on hedge fund closures, Bill Ackman's blues, dating Martin Shkreli, hedge fund trends, and GM's big bet

January 5, 2016 11:41 AM

Here's what is on the brain today, January 5, 2016...

The bear market in emerging market equities, which began in 2011, may eventually engulf developed markets too

It’s a tough day for stock pickers in emerging markets on news that Nick Barnes and Martin Taylor are shuttering hedge fund Nevsky Capital and returning money to investors.

It was 2013 when the fund was up double digits, but recent turmoil in emerging markets and competition from computer-driven trading strategies and index funds have diminished the fund’s money-making potential. Both managers will still be able to hang their hats knowing that they were able to provide an 18.4% annual gain since 2000, a figure that beat their peers by 10 times.

Bloomberg offers the eulogy.

For those who don’t recall Barnes and Taylor, these were two guys once willing to turn down roughly $70 million a year in fees because they wanted to manage $800 million per year and not the $3.3 billion they once had under management in the original fund.

The two reasons for scaling back?

One, they recognized that conviction was critical and that more money makes it harder to find things to invest in.

Second, they wanted to be able to invest in more of what they wanted to buy and own.

The key terms here are asset bloat and over-diversification. You might recall that these were two key reasons why many active managers are unable to outperform  passive managers, part of a story that Modern Trader (December 2015) featured on why do most active equity mutual funds underperform and the impact of portfolio drag.

In that piece, we spoke to Thomas Howard, Emeritus Professor of Finance at the University of Denver and CEO/Research Director of AthenaInvest. He has explored this question extensively and has reached an interesting conclusion.

Be sure to read this piece, as it outlines the three key metrics to better define on whether active managers are capable of outperforming passive ones. You’ll also find the top 10 funds available to investors. 

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