Snapchat is not about to disappear—this newspaper reported earlier this month that the firm may go public next year with a $25 billion valuation. Don’t you wish you had invested at a $500 million value? Lots of investors underwater this year sure do.
Last month Perry Capital, which peaked with $15 billion under management in 2007, closed its flagship fund. Richard Perry, a Robert Rubin protégé, complained in a recent letter to investors that “this market environment has not worked well for us.” Really? The Dow is now within a hair of its all-time high.
Some 10,000 hedge funds invest almost $3 trillion. More funds closed than opened over the last year. With $20 billion in assets, Lansdowne Partners is down almost 15% this year. The Rhode Island State Investment Commission is cutting hedge-fund holdings by half, following Calpers dropping hedge funds altogether last year. What’s going on? This isn’t a nasty bear market.
So many asset classes are in a funk. Macro investing, making bets based on major geopolitical trends, was all the rage over the last 25 years. But George Soros breaking the Bank of England is a thing of the past. Debt is now monetized rather than rationalized. There is a glut of commodities—from forests to food. Energy is fracked. Private equity probably peaked a few years ago, but it hasn’t yet marked to market. And bonds? When you have to pay Germany to own its sovereign bonds, it is tough to make money. That leaves stocks.
Equity investors have loved lower interest rates, because they make stocks more attractive than bonds and increase the value of future earnings. But at zero and even negative interest rates, it is a mess. Think of zero rates as a compass that can’t point north and only spins around. Dividend-discount models to value stocks are driven by a discount rate that at zero makes every stock worth infinity. So stocks look cheap, even though they’ve never been more expensive.
What to do? The first rule of investing, unlike Fight Club, is that there are no rules. Investing is like fashion. What’s hot and what’s not changes at the whim of the market. It used to be every fund owned Apple, until it stopped working. Right now we are in what CNBC’s Jim Cramer calls a Fang market, because of the power of Facebook, Amazon, Netflix and Google. Google has done the worst of the bunch since January 2015—up only 50%. Netflix and Amazon have both doubled. In an economy with 2% GDP growth, not much else works.