U.S. Markets closed

Why billionaire Leon Cooperman is warning young people to avoid the fund management industry

Leon G. Cooperman, CEO of Omega Advisors, Inc., speaks on a panel at the annual Skybridge Alternatives Conference (SALT) in Las Vegas May 7, 2015. REUTERS/Rick Wilking

Billionaire hedge fund manager Leon Cooperman, the founder of $5.2 Omega Advisors, said young people should perhaps look at a different industry than fund management.

“Maybe some of the young people should look into going into different industries...because I think our industry is in turmoil. It’s very ironic because you’ve got [Hillary] Clinton and [Bernie] Sanders crapping all over us and they don’t realize Wall Street is in the midst of a very serious downturn,” Cooperman, 73, said at the Benjamin Graham Conference hosted by the New York Society of Securities Analysts (NYSSA) in Midtown Manhattan on Wednesday.

Cooperman, who’s been running Omega for twenty-five years, told the crowd he recently attended a seminar on income disparity where a futurist spoke.

"Before I tell you what [the futurist] said: I’ll quote Warren Buffett who said: ‘The forecast of the future will tell you more about the forecaster than they’ll tell you about the future.’ The futurist said — his opinion was the biggest problem facing the economy in the next decade was that 45% of jobs being performed in the economy were going to be replaced by automation and there would be no alternative work for the displaced workers.”

After thinking about those comments, Cooperman realized that it has some significance for fund management.

“I recognized the potential significance for our industry. And the significance is… passive asset management turnover rate is 3% a year. Active asset management turnover is approximately 30% per year. So if more money goes passive versus active, liquidity in the market is going to diminish because there’s less trading. And the available pool of commission dollars to support Wall Street firm is going to diminish…” he said.

On the hedge fund side, Cooperman said there’s going to be ‘tremendous downside pressure on fees.’

Typically, fund managers are paid through a compensation structure commonly known as the "2 and 20," which means they charge investors 2% of total assets under management and 20% of any profits. The fees can vary from fund to fund, with some charging less and others charging more. Poor performance tends to reignite this debate.

“And I think what’s happening in my industry, you know, right now, I have this perception, maybe it’s an exaggeration, but… every investment committee in America is meeting to redeem out of hedge funds.”

Astute traders and long-term investors

Cooperman said he thinks the fund management business is splitting into two categories—high frequency algorithmic traders and long-term investors.

Yahoo Finance

“One part of the industry that’s apparently really successful, which I’m too old and it’s not my skill set is high frequency algorithmic trading,” he said.

He added: “The other is to be a serious long-term investor a la Warren Buffett, Ben Graham, and you guys. The problem with that if you’re running a hedge fund and you’ve got monthly, quarterly, or semi-annual liquidity to deal with, it makes you reluctant to go into things that are less liquid.”

He noted that he has the luxury of having 40% of Omega’s capital coming from its general partners.

"The industry is undergoing a major change...The market that we grew up in, is not the market today, he said, placing blame on regulations such as the Volcker Rule, Dodd-Frank, and the elimination of the Uptick Rule.  “You’ve got to be an investor today or a very astute trader.”

'Hedge funds will shine again'

According to Cooperman, the "golden period" of hedge funds was 2000 to 2007, with funds being the "cocktail party talk."

"Then, all the sudden, 2008 arrives. In my opinion, hedge funds largely lived up to their representation," he said, noting the S&P 500 was down 34%, while the average hedge fund was down 16%. He added that investors thought funds should make money no matter what, leading to a lot of withdrawals.

During this time, hedge funds "shot themselves in the foot" by gating capital and not honoring a high water mark when they shuttered their funds.

In the years following the crisis, with the market ripping, it's been hard to keep up with the index.

“If you’re running a hedge fund, it’s very hard to keep up with an index. Hedge funds have underperformed."

"My guess is it’s going to all change in the next bear market… it may take a bear market to damage all this passive indexation," he said, adding, "Hedge funds will shine again. Everything is cyclical."

--
Julia La Roche is a finance reporter at Yahoo Finance.

Read more:

The world's largest hedge fund identified the huge problems the Brexit poses

John Burbank: This time of peril may herald the beginning of 'the liquidation'

Raoul Pal: The stock market is behaving the way it did back in 2000

Hedge fund titans warn of financial crisis-like market signals

How one fund manager is preparing for the market liquidity crisis

Raoul Pal: the Brexit vote is about so much more than Britain leaving the EU