News that Stanley Druckenmiller was calling it quits after thirty years in the hedge fund business came as a big surprise to investors. His departure accelerates the list of legendary hedge fund managers closing shop and heading for less stressful pastures in the post-2008 credit crisis environment whereby macro trades have grown difficult to execute profitably.
Druckenmiller joins other legendary macro traders heading into retirement, including Julian Robertson (2001), Tim Barakett (2009) and recently, Richard Grubman.
Druckenmiller, who worked for hedge fund titan, George Soros, claims he's paid a "high emotional toll" recently for trailing benchmarks and certainly falling behind his blistering track record of generating 30% annually since 1990. In 2010, Druckenmiller's Duquesne Fund, closed to new investors since 2000, is down about 5%.
To be sure, Druckemiller has already made billions of dollars. The 57-year-old doesn't need the market. But it seems more hedge fund managers are leaving the ranks as the thrill to produce profits fades in an age of rising global dislocations, institutional counter-party risks, violent and choppy trading and tough calls on macro trades.
Fifteen years ago, I poured everything I managed into hedge funds – mostly guys like Soros, Druckemiller, Zweig, Bacon and, especially, Julian Robertson. I also invested in distressed debt, bankruptcy reorganization and event-driven strategies. Those strategies largely worked well producing compound returns of about 8% to 10% per annum after all fees.
But over the past several years I've grown extremely disenchanted with hedge fund investing because, for the most part, these guys really don't beat the market. The sector crashed almost 20% in 2008 as most managers were caught long or simply didn't know how to effectively short the market – unlike the legends listed above. Worse, many funds imposed gates or lock-ups on capital starting in late 2008 and extended advance redemption notices to 90 days ahead of each quarter – making it almost forever to get your money back once the redemption notice was delivered to the hedge fund.
Also, too many entrepreneurs were launching hedge funds after 2000 and that alone meant trouble. How many smart MBAs are really out there?
These days, I'm bullish on managed futures, or Commodity Trading Advisors. The asset class manages about $275 billion dollars (much smaller than hedge funds at about $2 trillion dollars) but, unlike hedge funds, trade mostly on a systematic basis employing market-based trend-following strategies. No hunches or guru stubbornness here; CTAs use trend-following systems to ride markets long or short. They also trade in over 100 world markets 24-hours per day.
Managed futures are coming off a bad year in 2009 and continue to show only modest gains this year. But, when volatility breaks loose, these guys rally hard. In 2008, CTAs gained about 17% as world markets crashed 40%.
Hedge funds still belong in a diversified portfolio. Some strategies remain compelling, especially bankruptcy reorganization amid a struggling economic recovery. Yet, I think the glory days for this sector at the macro level is about over. Once Soros finally retires, that'll mark the end of what was once a glorious period for hedge fund macro strategies in the 1980s and 1990s.