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June 12, 2017 at 11:24 AM
Be afraid. Be very afraid.
So said investing luminaries Bill Gross, manager of the Janus Henderson Global Unconstrained Bond Fund, and Paul Singer, founder of hedge fund Elliott Management Corp., at the Bloomberg Invest New York summit on Wednesday.
You’ve no doubt heard the gist of their argument a thousand times: The Federal Reserve flooded the U.S. economy with cheap money after the 2008 financial crisis by holding interest rates near zero and beefing up its balance sheet. Corporations and individuals responded by bingeing on debt and risk assets — as the Fed all but dared them to do.
The mere mention of leverage and inflated asset prices in the same sentence is enough to startle anyone who lived through the financial crisis. The clear implication of Gross and Singer’s warning is that another market crash is imminent.
They may be right, but their prognostication sounds more like wishful thinking than objective analysis.
Gross’s and Singer’s investment realms — high-grade bonds and multistrategy hedge funds, respectively — have been two the biggest laggards since the financial crisis. The S&P 500 has returned 18% annually from March 2009 through May, including dividends. By contrast, the HFRI Fund Weighted Composite Index — a collection of various hedge fund strategies — has returned 6.2% annually, and the Bloomberg Barclays U.S. Aggregate Bond Index has returned 4.2% annually.
Not even ace investors like Gross and Singer could overcome those headwinds. Gross has beaten the Aggregate Bond Index by 1 percentage point annually from March 2009 through May, first with the Pimco Total Return Bond Fund and now with the Janus Henderson fund based on returns for institutional share classes. And yet Gross has trailed the S&P 500 by a staggering 12.8 percentage points annually.
Singer couldn’t keep up, either. Elliott Associates has returned roughly 13.5% annually since its inception in 1977, but recent returns have been lower. Elliott’s full performance history isn’t publicly available, but based on annual returns provided by Elliott, the fund returned 11.2% annually from 2009 to 2016, while the S&P 500 returned 14.5% annually.
