Tuesday, November 10, 2015

PEU Return Theory Needs Revision

ValueWalk reported:

Funds racked up abysmal results last summer, with August showing the biggest monthly loss since October 2008

Then the prominent Bain Capital Absolute Return Capital hedge fund announced in early October that it would close, having lost money for three years. Soon after, the well-known Fortress Investment Group said it would shut its flagship fund after losing 17% for the year through September.

At the end of October, Carlyle Group’s Claren Road Asset Management LLC said that a heavy demand from investors wanting their money back would not be met immediately. Instead, two-thirds of the $2 billion in redemption requests would be spread over a number of quarters, a relatively uncommon practice used when heavy withdrawals are seen as potentially disruptive to fund investing strategy.
All three hedge funds have PEU sponsors.  Their declines and rollups punch a hole in the theory that private equity performs better than the overall market in difficult times and outperforms the market in good times.  One failure of a theory requires its modification.