Black Swan Hedge Funds Suffered Big Losses In 2012

April 12, 2013

The consistent active involvement of world’s central banks in financial markets in the last few years have forced some hedge funds to pare down bets on tail risk funds also commonly known as “black swan funds”.  After suffering big losses in 2012, large and well known hedge funds such as Pine River Capital and UK based Capula are among firms reducing bets on the likelihood of a financial meltdown similar to the one that followed the collapse of Lehman Brothers in 2008.

Black Swan Funds Hedge Against Doomsday Events

Image: Pension Pulse Blog

Black swan funds aim to not only buy protection from catastrophic events but also profit out of it. Hedge funds managing dedicated tail risk funds buy products like credit default swaps and put options to guard against and make big bucks from huge market slide. These funds initially gained popularity with investors who lost heavily in 2008 but their appeal is now waning as the S&P 500 index is now sitting at all time highs and an index measuring the level of investor fear is at its lowest point since before the 2008 financial crisis. Hedge funds such as Capula, Pine River Capital and Saba Capital are among firms running dedicated tail risk funds.

Fund Managers Divided Over Weightage To Black Swan Funds

While sharp losses have forced hedge funds such as Pine River Capital and Capula to pull back on black swan funds, there are some like Boaz Weinstein, head of hedge fund Saba Capital who view the current market conditions characterized by low volatility of assets as a good time to buy at cheap prices into tail risk hedge funds.

Jeroen van Bezooijen, a tail risk product specialist at bond fund PIMCO says investors pulling out of tail risk funds are short term focused and warns the Euro zone problems still persist. On its part, hedge fund Capula lost $1.1 billion or close to half its assets in its tail risk fund since the middle of 2012 while Minnesota based Pine River Capital lost 36 percent of its black swan fund in 2012 falling to $200 million from $300 million. PIMCO on the other hand now manages tail risk assets worth $50 billion, up from about $10 billion in 2009.

Hedge Fund Hiring Focused On Freshers

Hedge fund assets at the end of the first quarter of 2013 are at record levels aided in part by historic all time high US equity valuations. Normally one would associate such figures to underlying strength in the economy but Kenneth Heinz, president of Hedge Fund Research points out that continued extensive stimulus and quantitative easing played a major role behind the recent surge in US equities. It is also likely that the recent labor market weakness will prompt hedge fund managers to adopt conservative positioning. Given this scenario, though hedge funds that previously jumped in to black swan funds are cutting back because of accumulated losses, there will be new funds willing to buy protective puts through tail risk funds.

From a job seeker’s perspective, the net exposure of hedge funds to black swan funds is not going to matter much. That said, a recent survey by market research firm Quartz found that hedge funds are actively hiring fresh graduates and post graduates from prestigious universities for lower rung positions. This reiterates the current conservative nature of most hedge funds that are content to hire fresh graduates for cheaper wages rather than bringing in mid level associates that are expensive and often difficult to mold.

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