Topley’s Top 10 – August 28, 2020

1. 1995-2016 Hedge Fund Managers Kept 64% of Profits.

Opinion: Hedge fund fees — whether or not you make money — are truly shocking

Mark Hulbert

Hedge funds keep two-thirds of profits; investors get the rest

The professors analyzed a comprehensive hedge fund database containing nearly 6,000 funds over the 22 years from 1995 through 2016. Over that period these hedge funds collectively produced total gross profits of $316.8 billion. Of this total, fund managers kept $202 billion ($88.7 billion in management fees and $113.3 billion in performance incentive fees). The remainder—$113.3 billion, or 35.8% of total gross profits — went to investors. (See the chart below.)

The source of this skewed profit sharing is the asymmetry of hedge funds’ performance incentive fees. While the hedge fund industry receives a portion of investors’ gains, it does not to the same extent share in their losses.

It’s easy to overlook this asymmetry because it becomes evident only when focusing on the industry as a whole. At the individual fund level, incentive fees are only levied on performance that exceeds prior performance — exceeds previous high-water marks, in other words.

To illustrate how this performance incentive fee arrangement looks in practice, imagine the following two otherwise identical scenarios (setting aside management fees):

•        You invest in a single hedge fund that in the first year gains 20%, gives up all that gain in the second year (a loss of 16.67%), and then gains 30% in the third year. You’d pay a performance incentive of 4% in the first year (20% of the 20% gain), nothing in the second year, and only 2% in the third year (2% of the amount by which that year’s gain exceeds that fund’s previous high-water mark). Glossing over several details, your total performance incentive fee for all three years would be 6% of assets under management.

•        In the second scenario, imagine that you instead invest in three separate hedge funds with the same gains: The first gains 20%, the second loses 16.67%, and the third gains 30%. Because the losing hedge fund’s losses can’t be used to offset the other two funds’ gains, you will pay a performance incentive fee of 10% — four percentage points higher.

An extreme example of this occurred in 2008, during the Great Financial Crisis. Cumulatively that year, the professors report, the hedge funds in their database lost $147.1 billion before fees. Yet investors in those funds collectively paid $4.4 billion in performance incentive fees.

2. Call Options Betting on Higher Market Hit 1999 Levels

Options bets that the stock market will continue to soar have exploded to dot-com bubble levels

Mark DeCambre

Even as the stock market trades in record-setting territory despite the economy being in the throes of a viral pandemic, Wall Street bets for further gains are around their highest levels since the dot-com bubble, according to research from Bespoke Investment Group.

Options bets that the S&P 500 SPX, +0.16% will extend its run-up in months to come have roughly doubled, far exceeding trading in securities that would be used to bet that a decline in stock values was imminent.

Call options give holders the right but not the obligation to buy a certain number of shares (100 per option contract) at a certain price (strike price) by a certain date (expiration date).

Calls are viewed as bullish bets on an asset, as opposed to put options, and Bespoke indicates that appetite for calls, particularly among individual investors, has boomed.

“Retail enthusiasm for the market via commission-free trading apps plus the huge volatility earlier this year have led to a massive boom in options volumes,” the analysts at BIG wrote. “Most of the increase in trading activity in these derivatives has gone to calls,” they wrote (see chart below).


3. Yield Spreads Vs. Treasury..Energy Sector Highest.

From Dave Lutz at Jones Trading

David Rosenberg: Why it’s time to buy energy stocks now that Exxon Mobil has been booted out of the Dow – “It’s a classic contrary signpost for the downtrodden oil and gas equity sector” – as we re-enter a period of ‘ZIRP’ (zero interest rate policy) from the U.S. Federal Reserve — with no intentions of raising rates, or thinking about thinking about raising rates (as Fed chairman Jerome Powell put it) — investors are yet again forced to identify where they can get an income stream. In the period following the Great Financial Crisis, the answer has been in the stock market with the dividend yield exceeding the yield on the 10-year Treasury note on multiple occasions.

From Dave Lutz at Jones Trading

4. Never Invest Based On GDP…

One of the Strongest Aug Ever in Stock Market…On Back of Worst Quarterly Global GDP in History

The Worst Quarter in Modern History

We have 2Q GDP from almost every major country around the world now officially in the books. Bank of America Merrill Lynch says it’s “the worst quarter in modern history” and there’s no reason not to agree with that assessment.

Here’s my Chart o’ the Day:

GDP is down a GDP-weighted average of 8.1% yoy, easily the worst quarter in modern history…The US is right in the middle of the pack—down 9.5% yoy—but this is because the US has offset its ineffective COVID containment strategy with massive fiscal and monetary stimulus.


“Its official: the worst quarter ever”
Bank of America Merrill Lynch – August 18th, 2020

From Josh Brown Blog

5. S&P 500 heads for best August since 1986 as stunning summer rally continues