REUTERS/Gary Cameron
- Billionaires like Seth Klarman and Warren Buffett are holding onto billions in cash as markets soar.
- Hedge-fund investors looking for diversification and uncorrelated returns are frustrated by the large piles of cash not being put to use.
- "We have a limited tolerance for managers that don't run sufficient risk," said Jens Foehrenbach, CIO of Man FRM, the fund-of-funds run by Man Group.
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Billionaire Ray Dalio has a waiting list to get into his firm's Pure Alpha fund despite losing money in 2019, according to media reports. While a big reason for that is Bridgewater's typical performance trounces the average hedge fund manager, another reason might be that investors know Dalio wants to put their money to work.
"Cash is trash," he said in a CNBC interview at the Davos Economic Forum at the end of January. It's not an uncommon perspective from Dalio, who also said two years ago that investors would "feel pretty stupid" if they hoarded cash as stocks soared.
To start 2020 though, several big-name managers are holding billions in cash, like Warren Buffett and Seth Klarman. Klarman said in his annual letter that, in accordance with his strict value investing ethos, he sold out of "situations where the price has come to more fully reflect underlying value," to bring his portfolio's cash holdings to 31% at the end of the year. Last year, Canyon Partners told investors it had shifted nearly a fifth of the portfolio into cash despite holding no cash 12 month prior.
And Buffett meanwhile told investors that his record $128 billion cash pile means "I will never risk getting caught short of cash."
This has left hedge-fund investors - who saw the average fund return roughly a fourth of what the market did last year - frustrated.
"We have a limited tolerance for managers that don't run sufficient risk," said Jens Foehrenbach, chief investment officer, of Man FRM, the fund-of-funds for Man Group.
His issue with too much cash is the effect it can have on his overall portfolio of hedge funds.
"If you combine managers that hold excessive cash, the overall portfolio may not meet your investment objective," he said.
Commonfund runs $26 billion for more than 1,300 endowments and foundations, putting institutions' money to work in third-party hedge fund managers.
"We don't want to be charged management fees for our money to be sitting in cash," said Deborah Spalding, the co-chief investment officer of Commonfund.
Most institutional allocators, like pensions and endowments, bank on their hedge fund managers taking riskier than their long-only peers and index-fund providers. But an expensive market has many value investors skeptical of the prices being demanded in the public markets.
Billionaire distressed debt investor Marc Lasry said at a recent New York Alternative Investment Roundtable event that his portfolio has gone from being 80% public credit to 80% private credit over the last five years.
Hedge funds struggled with timing last year in the equity market, as Bloomberg reported in April that hedge funds missed the stock market rally to start the year following the equities slump in December of 2018 that cut down many managers' yearly returns. When managers finally began to take on more risk, momentum stocks fell drastically in September, with funds like Coatue Management and Winton Group, losing more than 5% in a couple of days.
A recent report from Societe Generale on hedge funds' holdings found that "despite an easing of the US-China trade dispute and the ensuing relief rally, net positions stayed close to zero, so neither bull nor bear. With hindsight, positioning clearly underestimated market momentum."
While managers have been weary overpaying in a record-setting market environment, billionaire hedge-fund founder Jamie Dinan however said at a recent conference in Miami that if he can't find something to invest in, "it's our problem, not the market's problem."
Still, managers should not be swayed by allocators' frustration over their strategy, said Ron Biscardi, CEO of Context Capital Partners, which connects family offices with hedge funds. He said that "you have to be careful to not let allocators take you off your game" if you believe holding cash, or any other decision, is the right move for the strategy.
"You do have to protect allocators from themselves sometimes."