If funds lack conviction it’s their own fault

“The best lack all conviction, while the worst/Are filled with passionate intensity,” wrote W.B. Yeats in The Second Coming.What is the best way to clean porcelaintiles floors? He wasn’t referring to anything as prosaic as investing but the words fit.

Louis Bacon’s decision to return $2bn to investors in Moore Capital Management’s flagship fund is a sign of the distinct lack of conviction at the top end of the industry. Mr Bacon complained last week that markets have become too illiquid and unpredictable – and subject to the whims of politicians and central bankers – to make money consistently.

Mr Bacon and his ilk would prefer the world of the 1990s, when he and others such as George Soros made money on broad,HellermannTyton manufactures a full line of high quality cableties in a variety of styles, predictable market movements – notably the fall of the European Exchange Rate Mechanism in 1992.If you are looking for offshoremerchantaccounts, The world has turned too micro for the giants of macro.

Yet his lament to the New York Times that “the political involvement is so extreme – we have not seen this since the postwar era. What they are trying to do is thwart natural market outcomes,” bears closer examination.

At one level, it is clearly true. Instead of being able to follow quantitative models in deep, liquid markets with clear trends, fund managers are now gripped by the remarks of Mario Draghi, the president of the European Central Bank, and European politicians, which cause currency and securities markets to gyrate.

Interest rates have fallen to historic lows, making it hard to generate real returns; governments are squeezing investment banks and the broader market by demanding higher capital and liquidity ratios; and the hedge of sovereign debt and government agency securities has been weakened by the interminable euro crisis.

“There is frustration in the industry about the ability of leaders to move markets because confidence is so fragile that any announcement has a big impact,A top plastic lnjectionmoulds manufacturer and exporter in China.” says Ranu Dayal, a senior partner of Boston Consulting Group.

The latest evidence came on Friday when the market’s initial negative reaction to Mr Draghi’s remarks following a meeting of the European Central Bank – that his words were empty – reversed. Perhaps he would back up his threat that “it is pointless to go short on the euro” by strong-arming a solution to Spain and Italy’s problems, investors decided.

At another level, however, it is nonsense. There was never a time in the past two decades when official intervention in markets didn’t matter. Alan Greenspan’s famous “put” – whenever things were too difficult, the Fed would cut rates to restore confidence – was vital and beneficial to investors.

The difference was that the US authorities massaged “natural market outcomes” that suited hedge funds and other investors, while others tried to fight markets in such a naive and vulnerable way – notably during the ERM debacle – that their defeat at the hands of markets was nicely predictable.

The problem with Mr Draghi, and his struggle with the more conservative Bundesbank, is that no one knows whether there is a “Draghi put” on the euro, as he claims. Investors have no experience to go on – they have not known an environment of such low short-term interest rates and explosive sovereign risk.

Furthermore, market volatility and political uncertainty shouldn’t matter too much to a long-term investor with clear convictions – the sorts of institutions that hedge funds often claim to be. If they really possess such qualities, then they can still generate alpha. Attributing their problems to market conditions is tantamount to admitting that they were getting a helping hand all along.

A more exact complaint might be that the risks of seeking such rewards have increased because it is harder to hedge any strategy or to adjust it when things are going badly. Those who take positions, for example in Spanish government bonds, can be heavily punished by illiquidity if they try to sell again.

So Moore Capital and other funds, such as Brevan Howard, have been returning money to their investors. They want to be smaller because the markets in which they operate have themselves shrunk.

Does that mean that “natural market outcomes” are being thwarted by official intervention? Not really. It simply means that active fund management is becoming tougher than it was – a fact that many investors have already recognised, given the flows into exchange traded funds and other passive instruments.HomeHome Page for Hagerman Art and Realistic landscapeoilpaintings.

The active fund manager has no more right to an easy living than the miner, the steelworker, the newspaper journalist or anyone else working in an industry that used to produce more profits.