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Yahoo
03-06-2025
- Business
- Yahoo
The $17 Trillion Illusion? Why One Wall Street Legend Says Alternatives Are a Costly Scam
Wall Street may be calling this the golden age of alternative investments but Richard Ennis sees something very different. The retired investment consultant and former Financial Analysts Journal editor just published a scathing new study arguing that hedge funds, private equity, and other alt strategies aren't pulling their weight. In fact, he claims they're quietly draining performance from the very portfolios they're meant to boost. Endowments holding 65% in alternatives underperformed a simple stock-bond benchmark by 2.4% annually over 16 years through June 2024. Pensions, with 35% exposure, trailed by 1%. That shortfall, Ennis points out, suspiciously mirrors the average costs of these vehicles. Warning! GuruFocus has detected 8 Warning Signs with KKR. His core argument? The complexity of alternatives masks an inconvenient truth: high fees and ordinary returns. Ennis believes the entire system runs more on narrative than numbers and consultants, CIOs, and multi-strategy funds are incentivized to keep the machine humming. Alts bring extraordinary costs but ordinary returns, he writes in The Demise of Alternative Investments, soon to be published in the Journal of Portfolio Management. Despite the underperformance, the asset class continues to balloon. According to Preqin, the alt industry held $17 trillion in assets by end-2023 and could hit $29 trillion by 2029. Firms like KKR (NYSE:KKR), and others now repackaging these vehicles into semi-liquid funds for retail investors, call it a golden age. Ennis calls it something else entirely: a slow-moving cost trap. Some argue Ennis is cherry-picking the timeline starting in 2009, when stocks ran hot and nearly everything else lagged behind. Others defend alts for reasons beyond return: reducing volatility, hedging inflation, and improving long-term outcomes. But Ennis remains unmoved. To him, passive indexing not private equity or hedge funds offers the most consistent value. And while public market names like Tesla (TSLA) continue to dominate the performance charts, the real story could be that institutions chasing sophistication are paying steep premiums for subpar results. This article first appeared on GuruFocus. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
03-06-2025
- Business
- Yahoo
The $17 Trillion Illusion? Why One Wall Street Legend Says Alternatives Are a Costly Scam
Wall Street may be calling this the golden age of alternative investments but Richard Ennis sees something very different. The retired investment consultant and former Financial Analysts Journal editor just published a scathing new study arguing that hedge funds, private equity, and other alt strategies aren't pulling their weight. In fact, he claims they're quietly draining performance from the very portfolios they're meant to boost. Endowments holding 65% in alternatives underperformed a simple stock-bond benchmark by 2.4% annually over 16 years through June 2024. Pensions, with 35% exposure, trailed by 1%. That shortfall, Ennis points out, suspiciously mirrors the average costs of these vehicles. Warning! GuruFocus has detected 8 Warning Signs with KKR. His core argument? The complexity of alternatives masks an inconvenient truth: high fees and ordinary returns. Ennis believes the entire system runs more on narrative than numbers and consultants, CIOs, and multi-strategy funds are incentivized to keep the machine humming. Alts bring extraordinary costs but ordinary returns, he writes in The Demise of Alternative Investments, soon to be published in the Journal of Portfolio Management. Despite the underperformance, the asset class continues to balloon. According to Preqin, the alt industry held $17 trillion in assets by end-2023 and could hit $29 trillion by 2029. Firms like KKR (NYSE:KKR), and others now repackaging these vehicles into semi-liquid funds for retail investors, call it a golden age. Ennis calls it something else entirely: a slow-moving cost trap. Some argue Ennis is cherry-picking the timeline starting in 2009, when stocks ran hot and nearly everything else lagged behind. Others defend alts for reasons beyond return: reducing volatility, hedging inflation, and improving long-term outcomes. But Ennis remains unmoved. To him, passive indexing not private equity or hedge funds offers the most consistent value. And while public market names like Tesla (TSLA) continue to dominate the performance charts, the real story could be that institutions chasing sophistication are paying steep premiums for subpar results. This article first appeared on GuruFocus. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Zawya
24-02-2025
- Business
- Zawya
What private equity can teach executives about metrics: Fridson
Wall Street is often blamed for reducing corporate managers' understanding of business to a single, gameable measure of success: quarterly earnings versus analysts' consensus forecast. The Making of Modern Corporate Finance: A History of the Ideas and How They Help Build the Wealth of Nations, an upcoming book from Donald H. Chew, Jr., seeks to reshape how many investors think about corporations' arguably excessive focus on simplistic financial measures. He argues that many executives could learn a few things from private equity. In this new book, Chew, the current and founding editor of the Journal of Applied Corporate Finance, describes how key innovations in financial theory have influenced real-world practice and contributed to America's exceptional economic performance over the past several decades. (Full disclosure, his book does explore my own work on high-yield bonds.) Chew argues that the problem is not that corporations focus on a specific quantitative measure of financial performance. Rather, the trouble is that too many focus on the wrong measure. The chief offender among financial metrics is earnings per share, as identified a half-century ago by Joel Stern in the Financial Analysts Journal article 'Earnings per Share Don't Count.' One example of value destruction arising from a preoccupation with EPS is when a company increases this metric by borrowing money to acquire a company less profitable than itself. While the acquisition will cause EPS to rise mechanically, it will also reduce the company's return on capital, one number that does deserve management's attention. Chew also suggests that widely diffused share ownership frequently enables managers to focus on the wrong measures of success. When companies have no controlling shareholder or assertive board of directors to keep them attentive to profitability, executives often single-mindedly pursue revenue growth, market share, and diversification, with little regard for shareholder return. CAPITAL EFFICIENCY According to Chew, the best run public companies are those that have adopted the governance practices of private equity, meaning they are not distracted by quarterly EPS games but are instead focused on employing capital efficiently and generating cash flow. One key to such companies' success is arguably the emphasis on equity-based compensation, which private equity firms helped popularize beginning in the late 1970s. Tying bonuses to share price appreciation gives managers a direct stake to what should be their true objective: increasing shareholder wealth, not manipulating accounting measures. Private equity, of course, has received its own share of excoriation by critics of modern corporate practices. And Chew does not dismiss these criticisms. For example, he acknowledges Enron as a rather conspicuous example of the potential downside of equity-oriented compensation plans. He also cites studies showing harmful consequences of private equity buyouts at non-profit colleges and nursing homes. And he notes the 'growing evidence' that PE companies have benefited by taking advantage of 'government regulations in ways that turn out to have significant social costs.' But Chew also cites studies highlighting private equity's positive effects, most of which have not received a lot of media attention. Such studies have found fewer health violations by private-equity-funded restaurants compared to their publicly traded counterparts and relative declines in workplace injuries at PE-backed companies. In addition, Chew writes, 'PE firms have been shown to be more likely than their public competitors to achieve growth by providing new products and in new geographic markets instead of simply raising prices for consumers.' Finally, he argues that the architects of leveraged buyouts have exerted a positive influence on corporate finance by emphasizing free cash flow over outdated earnings calculations that mismeasure performance in today's service-and-technology-oriented economy. What investors should ultimately take away is that setting quantitative targets – and measuring progress against them – is obviously not an obstacle to good corporate performance. In fact, it is essential. As the motivational speaker Zig Ziglar said, 'If you aim at nothing, you'll hit it every time.' The key for management is to focus on numbers that measure genuine success, which, as Chew suggests, often aren't the ones America's public companies are obsessing over today. The Making of Modern Corporate Finance: A History of the Ideas and How They Help Build the Wealth of Nations by Donald H. Chew, Jr., will be published by Columbia Business School Publishing on February 24. (Marty Fridson is the founder of FridsonVision High Yield Strategy. He is a past governor of the CFA Institute, consultant to the Federal Reserve Board of Governors, and Special Assistant to the Director for Deferred Compensation, Office of Management and the Budget, The City of New York.)
Yahoo
17-02-2025
- Business
- Yahoo
This cheap, balanced portfolio will be a better investment than most hedge funds
Don't look to hedge funds to rescue your portfolio from the mediocre returns that stocks and bonds are likely to produce over the next several years. As I've written repeatedly in recent months, the U.S. stock market is extremely overvalued, with an expected return over the next decade that is well below the rate of inflation. Bonds also appear to be unattractive, given the increasing likelihood that inflation will remain higher for longer. 'I want to enjoy the time we have left': I'm 68 and plan to work past retirement age. Should I empty my $700K 401(k)? The stock market just won't crack. Bulls say it's time for a breakout to new highs. Here's how Intel's stock charts look after its big rally. Should you buy it? 'We are shocked and upset': My mother died and her second husband said he now owns everything. Is this true? 'My retirement is going to be a disaster': I'm 59 and have $45,000 in my 401(k). I earn $72,000. Am I doomed? Hedge funds would seem to be the answer. They specialize in opportunistically moving between various asset classes. In theory, they should easily outperform both stocks and bonds. Unfortunately, the typical hedge fund's track record shows otherwise. Last year was a case in point. The traditional balanced portfolio that allocates 60% to stocks and 40% to bonds produced a 14.7% return (assuming the stock portion was invested in a broad U.S. stock market index fund and the bond portion was invested in a total U.S. bond market index fund). That's nearly double the 7.4% return of the Eurekahedge Asset Weighted Index, which is described by Eurekahedge as its 'flagship asset weighted index' of 1,438 constituent funds. This index, Eurekahedge adds, is 'designed to provide a representative capital weighted benchmark for the entire global hedge fund industry.' The index does represent an average of many funds, some of which did much better than average. But these outliers were not known in advance. We know that because of the performance of the Eurekahedge Fund of Funds Index, which 'is designed to provide a broad measure of the performance of underlying investment managers who exclusively invest in single manager hedge funds.' These funds of hedge funds employ analysts who scrutinize hedge-fund track records in hopes of identifying those that 'should' become superior performers. Yet, as you can see from the chart above, the Eurekahedge Fund of Funds index did only marginally better in 2024 than the Eurekahedge Asset Weighted Index (gaining 9.7% versus 7.4%, respectively), and still significantly lagged behind the 60/40 portfolio. The chart also shows that last year was not an exception. Each of the Eurekahedge indexes lagged behind the 60/40 portfolio over the trailing five- and 10-year periods as well. These results bring to mind the explosive conclusion reached by Richard Ennis, a former editor of the Financial Analysts Journal and co-founder of EnnisKnupp, one of the industry's first investment consultants. In an article published in the Journal of Investing in February 2024, Ennis analyzed the impact of alternative investments, or 'alts.' This category includes all asset classes other than stocks and bonds, such as 'private equity, private market real estate, [and] hedge funds.' After analyzing the performance of endowments and other large institutional investors, Ennis concluded: 'Alpha [the difference between a portfolio's return and its benchmark] appears to respond to the presence of alts as if the latter were kryptonite — the greater the exposure, the harsher the effect on alpha.' Hope springs eternal. And for many hedge fund aficionados, that means the promise of artificial intelligence. But this hope rests on shaky ground. Consider the performance of the Eurekahedge AI Hedge Fund Index, which is 'designed to provide a broad measure of the performance of underlying hedge fund managers who utilize artificial intelligence and machine learning theory in their trading processes.' This index has done even worse than its two broader Eurekahedge index siblings, producing annualized returns of 1.9%, 3.5% annualized and 5.5% annualized over the past one-, five- and 10-year periods, respectively. Hedge funds are more closely tied to the stock and bond markets than most recognize. We know this because of the correlation coefficient of hedge-fund returns and those of the 60/40 portfolio. The correlation coefficient of monthly returns of the Eurekahedge Asset Weighted Index and the 60/40y portfolio is 74%; with the Eurekahedge Fund of Funds Index, the coefficient is 72%. In presenting these sobering statistics, I am not suggesting that the 60/40 portfolio will necessarily perform well in the coming years. Expected returns for both stocks and bonds are mediocre. My point is that, regardless of how stocks and bonds perform, it's unlikely that the typical hedge fund or even fund of hedge funds will do better than a 60/40 portfolio. Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at More: Is this time different? How to invest as the 'Magnificent Seven' lose momentum. Plus: Hot CPI reignites stagflation fears. Here's why that would be disastrous for your 401(k). I'm a wife and mother. Can I secretly change my will and leave everything to my daughter instead of my husband? 'He doesn't drink, smoke, party or gamble': My boyfriend, 55, is perfect in many ways, but gets mad if I ask him to contribute 'We have no prenuptial agreement': Will my wife be able to take my money if I transfer it to my retirement account? My husband filed for divorce, but did not contribute one penny towards the mortgage. Is he entitled to half of our home? 'I can't stop thinking about it': My husband bought substantial properties prior to our marriage. If he sells them and we divorce, will I get half?
