Among the many hedge funds disclosing recent losses is the main one run by Renaissance Technologies. Jim Simons, the spectacularly successful hedge fund manager of Renaissance, just reported that his main hedge fund has lost 8.7% so far in August. Nonetheless, in a letter to investors, he claims that "The culprit is not our Basic System" of investing (no online link yet). (According to Wikipedia, Simons’s personal compensation was $1.7 billion in 2006 and $1.5 billion in 2005.)
Hedge funds that severely restrict withdrawals may not be subject to severe challenges in the next few weeks, but others that don't routinely restrict substantial redemptions from investors may be selling parts of their portfolios — both to deleverage their investments and to raise cash to pay investors.
For the last few months, I have been developing and forward testing some statistical models to predict daily moves in the US stock market, ETFs, and some no-load, no-fee mutual funds. I noticed that in late July, my models ceased predicting moves in both the stock market and in commodities. I then completely redid the models, which have performed well in August, but they are much less consistently correct than they were in the May to mid-July period. Things have changed from the way they were from mid-2003 to mid-2007.
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Oh, man. . .
Perhaps not.
Just to be clear, it's very easy to develop and back-test models that would have performed wonderfully in the past. The test of any model is its ability to predict the future, which is extremely difficult, if not impossible.
So last spring I developed and back-tested models. Then, using these models, almost every evening I made daily predictions of the performance of the market and various funds the next day. These models worked well until late July, when they performed very badly. I then redid the back-tested models including late July data.
On balance, those new models have done well in August in real time (predicting the next day's performance of the market and of particular funds). Nonetheless, the August returns are so variable that I have little confidence in these models, so I have committed only a very small amount in an old IRA account to using these new models to trade.
I hope that answers your questions.
Even hedge funds without any withdrawals may be subject to sizable margin calls if they're highly leveraged. One of the drivers of the current downturn is banks marking-to-market these illiquid mortgage-backed securities, which is eating into the margin cushions and forcing some funds to either sell into a dropping market (bad) or raise new equity (impossible).
The mean hedge fund has done okay recently, it's just that some have had great months and others have blown up.
Except for climate models, obviously.
Good point.
/s