Focus on hedge fund returns puts “the wrong emPHAsis on the wrong sylLABle”
A commentary in the Wall Street Journal last month by Yale Professor Jeffrey Sonnenfeld marked the start of a new salvo of criticism of hedge fund performance. In the piece, Prof. Sonnenfeld argues that if activists can’t beat the S&P, they have no business in trying to get companies, such as DuPont, which are not underperforming the market, to make strategic changes.
At his annual meeting in Omaha, Warren Buffett gloated that his famous wager with Protégé Partners was still in the money, noting that the cumulative returns in the S&P handily outperformed a hedge fund index since 2008.
The pervasiveness of media focus on hedge fund returns illustrates how unsophisticated media coverage of alternative investment can be. Industry critics, such as Prof. Sonnenfeld understand this and use it to their benefit. It is extremely rare to find citations in the press of the real reasons institutions invest in hedge funds. Institutional Investor, reporting from the SALT conference noted an executive from Wellington saying “people invest in alternatives for five reasons, including to diversify, to add value in a separate bucket and to limit volatility.” But that comment was in response to Greg Zuckerman, the Journal’s long-standing hedge fund reporter who quipped that his 60% stock – 40% bond portfolio beat hedge fund returns.
Returns are not the issue. Nor, in fact are hedge fund fees or hedge fund compensation. There is nothing more elastic than demand for hedge funds. If you don’t deliver on your promise to investors, they walk. End of hedge fund. End of story. That does not stop the media from perpetuating simplistic views of the industry. According to the Journal, at the Ira Sohn conference, Barry Rosenstein of Jana Partners lamented “the media covers activist campaigns like political campaigns, focusing on the horserace rather than on the substance of their suggestions.”
Hedge funds have counter punched. Trian Fund Management defended its returns in a letter to the Journal and Daniel Loeb of Third Point swiped at Buffet during the SALT conference. A new study from UCSD goes right after the Yale data by making a case that hedge fund activism is good for stocks.
To give a forum for activists and their critics, Proxy Mosaic organized a conference call featuring Jared Landaw, GC at Barrington Capital, Kai Leikefett, partner at Vinson & Elkins, and this author. A playback is available.
The numbers from hedge fund supporters and critics will be debated forever and the media will continue to try to keep score without trying to find deeper meaning. When it comes to hedge fund activism, the game is not about wins and losses. The simmering question is are these guys good for our system?
And if you don’t remember the reference in the title to this post, here’s a hint.