By Michelle Celarier
When AR launched last September, we breathed a sigh of relief when the tally of the Billion Dollar Club came in. Our semiannual survey of American hedge funds managing $1 billion or more showed that while the total assets under management were down, the percentage drop since January was under 5%. The free fall was over, performance was rebounding and a turnaround seemed under way. That still holds—but just barely.
The new survey shows that the 213 hedge fund firms with $1 billion managed a combined total of $1.18 trillion in assets on January 1, up 4.2% from the year earlier.
This may be good news, but it's far from what most people expected. When we polled our readers last September, asking if they thought U.S. hedge fund assets would reach $1.5 trillion by January of this year, 64% said yes.
Apparently, our readers are more optimistic than the public at large, which seems to be full of rage and despair. First, there's the mob who have joined the so-called tea party movement to protest just about everything the government does except fight wars. But Americans tend to prefer individual to collective action. Two particularly bloody acts in 2010—and the year has hardly begun—are tragic examples of that. I'm referring to the unemployed software engineer who crashed a suicide plane into the IRS offices in Austin, Tex., and the lone gunman so angered about the reduction in Social Security benefits that he stormed the Las Vegas federal courthouse, killing a court officer.
These events are a stark reminder of the grim state our nation is in. The Obama administration is under tremendous pressure not to add to the debt (or raise taxes), while the need for government aid to its citizens is only bound to rise. Whether or not the economy is statistically in recovery, we all know that millions of formerly middle-class people have been thrown into poverty, many on the verge of homelessness, with little hope of a better life. Without a massive Works Progress Administration program à la the 1930s, not to mention health care reform, I don't see how that is going to change.
What does this have to do with hedge funds? In February, the Fed raised the discount rate banks pay to borrow emergency or overnight funds from the govenrment. Presumably, the move was meant to show tough action against the financial institutions it has been subsidizing. At the same time it raised the discount rate, the Fed said it has no plans to raise interest rates in general. Fed Chairman Ben Bernanke is a student of the Great Depression, so surely he knows how disastrous that would be. But it's still uncertain whether political pressures won't push the government into some pretty stupid decisions that will make things a lot worse. Or political paralysis could lead to no action at all, which would be just as bad.
Right now we're in hold-your-breath territory. Until we see some improvement on the ground, it's still too early for hedge funds to party.