What “Smart Money” Smackdowns Mean for the Individual Investor
CNBC reports Monday that Apple may agree to a dividend increase, buyback, or another form of capital distribution to shareholders. Apple’s $137 billion cash stockpile was in the news last week after hedge fund manager David Einhorn’s Greenlight Capital sued the company, demanding it dole out a bigger piece of the pile to investors.
Related: Einhorn on Apple: I Can Create Something Out Of Nothing!
Whether it’s this “unusual” move from Einhorn or a televised smackdown between billionaires Carl Icahn and Bill Ackman over Herbalife (HLF), hedge fund investors seem to be making more noise these days.
Mark Connors, founder of Risk Dimensons, a firm that advises hedge funds on managing risk, tells The Daily Ticker that hedge funds have in fact gotten louder, a trend he attributes to market underperformance.
“For the past several years hedge funds have underperformed the broader market, and the main reason is the tools they’ve employed for decades have been blunted,” Connors says.
Though certain hedge funds have certainly bucked the trend, hedge funds overall have lagged the S&P 500 (^GSPC) every year for the past 1o with the exception of 2008, according to CBS.
Related: Female Hedge Fund Managers Ruled the Markets in 2012
Connors argues that earnings seasons are not the opportunity they once were for “smart money” due to the risk-on/risk-off dynamic of markets, where macro events trump fundamentals. He also says there is less liquidity in the financial system since 2008 because of increased capital requirements and the Volcker Rule. As a result, hedge funds can’t run large positions or cash out of them as frequently as they once could.
These new market conditions are causing hedge funds, when possible, to create events or catalysts that will help them make money, according to Connors.
Hedge fund investors are also operating to a greater extent in the same space as retail investors when they can. With Apple, you have an investor trying to “bend time” to benefit his position now, potentially impacting the company and ordinary investors, Connors notes.
“Here you have hedge funds moving from the trading room where they were able to make money to the board room,” Connors says, adding that he expects the trend to continue.
Connors also believes factors that have driven hedge funds from their pre-2008 feeding grounds are likewise driving Dell (DELL) management to "pull up its public company tent pegs and weather the global slowdown under cover of a private enterprise."
“Dell is a mature business with a low multiple ripe for a shareholder activism to unlock value, which would compromise management and Dell's control,” he says. “Going private affords them a safe harbor to retool.”
Related: Here’s The Secret Private-Equity Plan For Dell
As for the future of the hedge funds in this environment, he says they can still attract customers and justify the fee structure (typically 2% of total asset value as a management fee and an additional 20% of any profits earned), because investors such as pension funds are still worried about managing major downside risk.
“You want someone in your arsenal who can preserve your capital,” Connors says, pointing out that hedge funds fared better than the broader market in 2008.
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