On Hedge Fund Performance, QE3 and a Member's Insight

Last night I gave you the updated figures for Hedge Fund Performance on the year, it went from a staggering 89% of all funds under-performing the S&P to an even worse 92% of all hedge funds underperforming the S&P.

While some funds do offer quarterly redemptions, typically it is annual, sometimes bi-annual, but the standard is still annual.

As you know I have several family members, friends and acquaintances either in Finance or Hedge Fund managers. I've been in the office, I've seen the equipment and resources that even a micro fund has. The larger funds have a lot more and a lot more to lose as managers making bonuses of millions of dollars on the conservative side, they don't want to lose that. As mentioned last night they have "Expert Networks", which is the legal way of saying inside information.With the S&P making such a nice run since the June 4 lows, it's hard to imagine that almost the entire industry is underperforming the S&P benchmark. I didn't think too much about why and was more just shocked by the number given historical performance and given the resources they have, it's almost inconceivable that only 8% are beating the S&P!

What is smart money is not as dumb as they appear to be? That's more or less what this short member email said. While I have been cautious to post the long term charts until I understand whether or not QE3 was priced in or whether it creates a reset, I will post a long term chart for the same of this example.

On this 4 hour chart of the SPY, 3C has not been wrong; it correctly called the March-May distribution leading to a decline, it correctly called the June lows even as the price pattern told us to expect another leg down. I have said several times that if we look at the indicators without price, this appears to be a counter-trend rally, meaning the primary trend is bearish and the counter-trend rally, being a typical feature of a bear market is used to regain retail's confidence, get them back in the market and then sell or short in to price strength leaving retail holding the bag as the market moves to new lows. Price won't allow us to classify this as a counter trend rally because of the higher high above May 1, but 3C certainly does look like a counter trend rally in which smart money would be selling in to strength. After the initial positive divergence at the June 4th low which we caught before it happened, there was a leading positive and shortly after it went negative and currently leading negative, exactly what a counter trend rally would look like.

Then this morning I get this email from a long term member...

"Hi Brandt,

3c explains why hedge funds have been doing so bad lately, if 3c is accurate then they have been dumping their holdings and shorting into this move higher right before the QE announcement."

So, thus far the long term 3C charts at the two major reversals this year have been spot on, most hedge funds have until the end of the year before redemptions hit, if they are indeed selling short in to price strength as 3C has been showing, perhaps they in fact do know something that we don't and perhaps QE3 was priced in. They have a quarter left to make a return, if smart money is correct, if the first major divergence between the Surprise Index and the SPX is correct, if the SKEW Index thus far (posted last night) is correct, and the other multiple indications (not just 3C) are correct, perhaps smart money is taking a bout of drawdown for a very specific reason, perhaps the majority is correct and the 8% minority is not.

I have looked at the evidence/charts, but I never thought about the huge underperformance in hedge funds and the connection that the member's email made.

An interesting view point. Of course I'll withhold QE3 judgement for now, even though the stated goal of QE3 is diametrically opposed to the policy, we'll keep collecting information for the probabilities, but that was a fascinating insight that was so obvious I didn't even notice it.