Are hedge funds going soft? Minyanville seems to think so:
It’s time to call the hedge fund industry what it has become — a bunch of scaredy cats trying to hold onto “2 and 20” paying assets. Let me explain…
Here’s how it works. Essentially, hedge funds begin every month short an equity index call option a few percent out of the money. If markets don’t move a lot directionally they presumably have enough skill to grind out a little performance. If markets rally significantly, however, they have to chase the upturn so that they don’t fall too far behind their benchmarks.
Right now, a hedge fund manager’s best friend is a 5% selloff during the first week of the month. Why? All of a sudden it’s easy to look good. Any performance number for the month suddenly looks reasonable; even better, if we get one of those fluke 2-3% rally days there’s no pressure to chase it because the market will still be down a couple percent on the month. This peaceful state of mind lasts until the end of the month, at which point it’s time to stress about a big rally in the following month.