From a financial journalist at their hometown
Minneapolis Star-Tribune:
http://www.startribune.com/minneapolis-hedge-fund-exposes-the-dark-side-of-hedge-funds/364686211/.
While I suspect the writer is being a bit too gentle (he presumably needs continuing access to the principals, so...), he argues that the hedge fund industry is sort of a sham and that Whitebox failed, mostly, because they were trapped by the logic and discipline - if not quite the fees - of their industry.
I'm very sympathetic to the argument that hedge funds should pay off
sometime; that is, the failure to capture the extent of a bull market is excusable while the failure to do well in a rising market or a flat market or a falling one pretty much explains why "the smart money" ought to be shifting to muni bonds or some such. The continued economic vitality of the hedge fund world raises serious questions about what they think the word "smart" actually means.
David
Comments
Couldn't you write a similar article on the active mutual fund industry based on the failure of the Third Avenue Junk bond fund citing how the average active mutual fund (over the entire universe) fails to beat an arbitrary index? Qualitatively, it would be the same level of insight into that universe.
"Star" hedge fund managers based on past history attract money and fail when markets don't co-operate for the bets they make. How is this qualitatively different than people piling on to new and unproven mutual funds like RSIVX based on the manager reputation that could go anywhere and yet went nowhere but down?
Hedge fund managers, VC fund managers, private equity managers, active fund managers all have a good thing going for them in managing other people's money with a lot of upside and no downside.
It does feel good to knock down the 1% in a populist way but in the case of Whitebox it isn't the 1% that got hurt.
People piled into Gundlach's funds, even though they use "exotic financial derivatives like total return swaps". (See below.) IMHO use of exotic derivatives has become more commonplace - they're not limited to hedge funds and a few offbeat mutual funds as the article suggested. Though they're still insignificant if not absent from vanilla funds.
People piled into DoubleLine, into Yacktman, and others based on the managers' long term past performance at substantially identical funds. Not on a short term (3 year) record at a fund that was substantially different. RSIVX by design holds longer term, often illiquid bonds, than RPHYX, as opposed short term bonds ("think 30-90 day maturity").
So ISTM there is a qualitative difference between piling into funds like RSIVX (unproven management for that type of fund) or TFCIX or WBMAX (both with untested strategies for open end funds), and piling into proven management and strategies in the hedge fund arena. Another example of a mismatch between strategies and open end funds - stable value funds. There were (as I recall) over a dozen open end stable value funds attempted. They couldn't handle the open end fund daily redemption requirement.
YACKX also floundered for its first couple of years. It was only in 1994, in a relatively flat market, that it began to shine. Yet people stuck with him. Quoting Yacktman: "My only real fear in 1993 was that people who put their money in during 1992 would take it out at a loss. I didn't want this to happen, because I knew my performance would come back. ... As it turned out, more money came in than went out."
With hedge funds, accredited investors have the responsibility (and supposedly the opportunity) of investigating the offering. These "sophisticated" investors don't get the same disclosures as are required of open end funds. If managers have buried past failures, it's up to the investors to discover that.
The mandated disclosures of open end funds are supposed to make it easier for the other 99%. It is their choice to accept or reject a disclosure that discloses little other than: "just trust us".
DoubleLine funds and total return swaps:
Reuters, Nov 16, 2015: RiverNorth/DoubleLine Strategic Income Fund possesses economic exposure to an aggregate of 1,103,373 shares of Common Stock [of FSC] due to certain cash-settled total return swap agreements."
ThinkAdvisor, Nov 22, 2013“It’s [DSEEX] put together using a total-return swap,” Gundlach said of the fixed-income side of the fund.
Probably other funds; this was a quick search.
Specific issue in retrospect was these were actually "black box" funds. Now if they named them so, no one would have invested. The name suggested something unique, but it was a lie.
Good stuff msf!
I actually think the folks at Whitebox did all they could to articulate their strategies. I never got the impression they wanted their investors to "Just trust us...," like the article suggests. Their conference calls and quarterly letters were straight-forward and insightful, often compelling, seemingly well intended.
Nor were their fees high. They eliminated their loaded share class. Certainly, room to do more, but still, pretty good, relatively.
Their strategies simply did not play out in the last two years, after they decided to "exit the Mr. Market bus."
As we discussed last March, they are in pretty good company.
Keep thinking maybe they were too clever for their own good, something David alluded to in his profile.
Yes, gonna need to get access to principals to better understand how it ultimately unraveled. We did try to get a phone interview for David with Mr. Redleaf, but Whitebox declined.
I'm honestly disappointing they were not more successful.