On May 28, 1962, an investor taking a three day break from the ticker would have returned to find no change to the market. He would have also missed the second largest daily decline (then) on record in what is now called the flash crash of 1962. Some active managers are feeling like that’s what they should have done last month. Masked by a positive 2.4% total return for the S&P 500, October’s volatility shook the active management world. The turbulence prompted the Wall Street Journal to run an article referencing a “bloodbath for hedge funds” citing failed deals, concerns of slowing economic growth and the slide in energy prices as factors that worked together to wreak havoc on hedge fund managers.
Eager to share our own unique perspective, we wrote a short piece on the violent swing in the market in relation to hedge fund managers. We told the story of how herd selling effectively moved stocks, sectors and markets. Right now thousands of managers are diligently typing up stories of their own as the markets have completely rebounded from the mid-month trough and ended well in the green. In the coming weeks hedge fund investors will receive monthly letters and reports on October’s performance from their managers. The contents of those letters will vary widely depending on the results, but I am guessing many of these letters will be tricky to write. The way the message is received, interpreted and understood on the investor’s side of the table depends very much on how much emphasis they put on data and objective analysis.
The October “V” caught many managers: A manager long the market could have taken a 5.5% hit and missed the 8.4% rally.
A month like October can truly shed light on the skill of your managers and the conviction they have in their portfolio. Managers will have prepared their own explanations as to what happened but being armed with the right questions will help investors get to the heart of the matter. What are the some of the questions to ask your equity managers about their performance? It is very likely that their October return is going to be effected by some of the following concepts:
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