I have an investor day this week, and one of the questions was whether we actually need hedge funds? Its a good question. When I look at markets now, I think probably yes which is why, early last year, I launched Brumby. That being said I can (easily) see the case for why you don’t need hedge funds. If we are just in an inflationary world, asset prices will just keep rising and being passively invested makes sense.
When I first got into markets, Japan was already 10 years into its bear market. And I had seen numerous “deflationary” busts, that had wiped out investors. From my perspective - you needed a hedge fund, because the deflationary forces of capitalism made equities perilous. The idea of a 50/50 bond equity portfolio emerged from this era. If you look at how S&P 500 and total return index of US treasuries traded from lets say 1976 to 2016, if equities when too far relative to bonds, they would then correct back. You can see the top in 2000 and in 2007 very clearly.
But since 2016, and especially since 2020, a long SPX, short TLT trade has been fantastic, it has generated a near 500% return, with barely a drawdown.
In my mind, the obvious driver of this has been the US government, which has been running 7% deficits during boom times, and is forecast to continue to do so.
In simple terms, the US government has boosted the economy, by trashing its own balance sheet. Corporate credit spreads have collapsed, because all the money is being transferred from the government to corporates.
The bull argument is that the US government cannot go bust, so this situation can continue to forever - which in case, Long SPX or Long QQQ with a short TLT position makes sense - or in other words passive investing is the right answer.
The bear argument is that historically speaking, when other governments have tried to enact this policy - bad things have eventually happened to them.
