This content is from: Portfolio

The Morning Brief: No Mention of Carried Interest in Fiscal Cliff Talks

The fiscal cliff deal announced on New Year’s Day, strikingly, did not address carried interest. This is astounding given that virtually every single hedge fund manager agrees it is absurd that they continue to receive a special, lower tax deal. In fact, Appaloosa’s David Tepper recently said publicly on CNBC: "Get rid of this stupid carried interest."

Sandridge Energy has thrown the latest punch in its fight with TPG-Axon, which is trying to take control of the company and remove the current directors. In a Consent Revocation Statement filed with the Securities and Exchange Commission, the energy company told shareholders to reject the directors hand-picked by the hedge fund and to oppose other recommendations made by TPG-Axon, such as de-staggering the board of directors and removing all seven current Board members, calling the hedge fund and its supporters “a group of dissident opportunistic stockholders with short-term interests.”

Hedge funds have cut back on their bullish bets to the lowest level since June, as measured by one indicator. According to Commodity Futures Trading Commission data, speculators cut net-long positions in 18 futures and options contracts by 11 percent in the week ended December 24. This is the lowest level since June 19.

And finally, hedge funds have completed their fourth straight year of underperformance. Although the official numbers have not come in yet, the average hedge funds looks like it gained somewhere in the mid-single digit range. This compares with a 16 percent increase for the S&P 500, if you include dividends reinvested. That’s what the gain worked out for retail investors who put their money into the index funds that track the widely followed benchmark and instead of paying 2-plus-20 they paid a few measly basis points for this outperformance. When the final data comes in, the largest macro funds headed by some of the most famous managers like Louis Bacon, Paul Tudor Jones II and Andrew Law probably lagged the average hedge fund return. This sustained underperformance for hedge funds in general should continue to put pressure on some managers to lower their fees. As we pointed out earlier, according to Preqin, just 42 percent of single-manager hedge funds still charge a 2 percent management fee and 20 percent performance fee. The mean management fee for single manager hedge funds is down to 1.60 percent, while the mean performance fee is 18.69, down from 19.20 percent in 2011.

Follow Stephen Taub on Twitter @stephentaub

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