• The billionaire Steve Cohen has been posting double-digit gains this year following a period of underperformance, according to multiple people we've spoken with.
• The gains come as a third-party firm has been pitching potential investors on Cohen's comeback.
• Cohen may open up to outside capital again in 2018 after his firm was banned from the industry for insider trading.

It sounds as if the billionaire Steve Cohen is having a surge in performance — and at exactly the right time.

Exact numbers are hard to come by — even some senior staff members at Cohen's family office, called Point72 Asset Management, don't have a complete picture — but several people with knowledge of the matter say the hedge fund manager is posting gains just as he plots his return to managing outside money again.

Point72, with $11 billion in assets, is up by as much as the high teens this year, one person close to Point72 said — though that number requires caveats.

Here's a breakdown of what we've heard from people close to Point72:

• The firm was up about 8.5% after expenses through August, according to a separate person who said they had seen the figures.
• In September, the firm's main fund posted gains of 3% to 3.5%, largely because of its fundamental long-short portfolio, bringing gains to about 11% after expenses through September, according to the first person.
• And in October, the fund posted gains of about 8%, this person said.

On the high end, that would mean Point72 could be up as much as 19% this year — though it's unclear whether that figure takes into account expenses. But it roughly lines up with what another person, who is close to Cohen, has said: that the fund is up this year in the mid-teens.

And numerous other people in the hedge fund launch space have said the fund is doing better this year, though few of them had specific details.

Point72's expenses are high, meaning fees could shave off several percentage points on the numbers we've heard, according to people who have worked there.

Jonathan Gasthalter, a spokesman for Cohen, declined to comment.

Point72 has been cagey about releasing its performance, and not all staffers receive it. Even investors who have been pitched on a potential new fund haven't gotten updated figures. That has led to a lot of speculation.

What's universally said, though, is that performance has gotten better since last year, when the fund finished roughly flat.

The underperformance had concerned Cohen, according to a person close to him. After all, he was known for knockout returns in the 30% range before his hedge fund SAC Capital was shut down over insider trading.

Cohen is mostly known for long-short equity investing. He has been running a family office called Point72 Asset Management, with some $11 billion of his personal fortune and that of some staffers, since 2014 after he agreed not to manage other people's money and return outside investors' capital. The agreement came after a multiyear insider-trading investigation at SAC that ended with a conviction for one of Cohen's subordinates but not him. His failure, according to the SEC, was to supervise those traders as head of SAC Capital. SAC also pleaded guilty and paid a record fine, $1.2 billion, to settle insider-trading claims.

Cohen, via an external marketing firm, has been laying plans to potentially manage other people's money for the first time since shutting three years ago. The new fund would be called Stamford Harbor.

To be sure, Cohen could still decide against launching. Everyone we've spoken with stressed that it was not official yet, even though some investors have been pitched.

The Wall Street Journal reported in May that Cohen was seeking to raise about $9 billion, which combined with his roughly $11 billion family office would lead to a $20 billion fund — the biggest hedge fund launch of all time.

But a person with direct knowledge of the plans told Business Insider last month that Cohen's Stamford Harbor fund was likely to aim closer to $2 billion in fresh funds.

Either way, the fund is one of the most talked about among investors, and banks' prime brokerage units have been clamoring to get a piece of the business.

The external marketing firm, ShoreBridge Capital Partners, has been pitching Cohen's potential new fund to some of the world's biggest hedge fund investors and is said to be requiring minimums of $100 million, Business Insider earlier reported.

Doug Blagdon, who has facilitated investor meetings regarding Stamford Harbor at ShoreBridge, didn't respond to a voice message and email.

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• Passive investment has exploded in popularity, putting pressure on active managers that charge higher fees.
• Variable pricing mutual funds are a way that active managers can charge fees on a performance-driven basis, but they're not without their risks

The popularity of low fee exchange-traded funds has come at the expense of active managers, who now have no choice but to fight back. And in order to stay afloat, they're going to have to get creative.

That could very well involve reinventing themselves by charging fees based on performance. While that may seem obvious, most funds have historically charged their clients a flat management fee, regardless of returns.

Now it may be in their best interest to implement so-called variable pricing mutual funds, the adoption of which could "radically alter" money management as we know it, according to Citigroup.

"The rise of passive investment management has undermined the profitability of the asset management industry," Robert Buckland, chief global equity strategist at Citigroup, wrote in a client note. "The stock market has recognized this. In the old days, asset managers used to outperform the bull market. That is no longer the case. Companies need to reinvent themselves."

How did it come to this?

Before we get into the specifics of the potentially game-changing variable pricing funds, let's take a step back and assess how we ended up in this situation.

At the root of the shift has been the proliferation of passive investment, as Buckland mentioned above. ETFs, which typically follow and index and stand in contrast to their actively managed mutual fund counterparts, have become one of the world's hottest investment products.

According to the EPFR, passive equity funds have seen global inflows of $620 billion in the past 12 months, while active funds have seen outflows of $359 billion. In terms of sheer size, the combined assets of US ETFs hit $3.1 trillion in August, increasing roughly $700 billion in a single year, Investment Company Institute data show.

A big part of this divergence in flows stems from how much cheaper passive funds are. Citigroup notes that the average charge for a US-based active equity mutual fund is currently 84 basis points, compared to just 11 basis points for passive. Hence the importance of active managers making their pricing more attractive.

The potentially game-changing role of variable pricing mutual funds

That's where variable pricing mutual funds come in. Pioneered by AllianceBerstein earlier in 2017, the methodology is simple: the bigger the outperformance, the bigger the fee.

Citigroup finds that this fee structure generally delivers investors better net returns than at the present time, except during periods of substantial outperformance. In other words, they may cap potential upside, but they also don't leave investors wanting more in the event of more average returns.

It also incentivizes the mutual fund managers to crush their benchmarks, especially since they'll get a smaller fee if performance is middling. Here's a visual representation:

With all of that in mind, Citigroup says these funds will "radically alter" the industry in the following four ways:

• Management fee rates and thus revenues would likely tumble for many players
• Underperformance could rapidly consolidate the market should the product find mass adoption
• It could raise execution risks around compensation and expense management, capital management, and introduce significant P&L volatility
• The industry's multiple would likely compress

Where do we go from here?

In addition to the risks outlined above, Citigroup also sees active manager margins coming under serious pressure during periods of market losses. And such a development would hit investors right in the wallet, given the "significant cultural pressure on compensation" that would likely result from lower fees.

Citigroup also warns that potential investors in variable pricing mutual funds could end up paying high fees for trailing performance that they didn't themselves enjoy. On the flipside, following weak periods, the firm says that funds would have to worry about "free riding"— the mutual fund version of value investing, which involves finding underpriced assets with strong upside.

Overall, variable pricing mutual funds are an intriguing proposition, but one that certainly has its fair share of drawbacks. Still, no one ever said disruption was easy. And regardless of whether these vehicles become widespread, it's clear that active managers must somehow adapt to survive.

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• Tourbillon Capital is a $3.4 billion New York hedge fund led by Jason Karp.
• The fund has lost money in its flagship fund, but says despite the bull market, there are still stock-picking opportunities; it just requires patience.

Jason Karp, the head of $3.4 billion hedge fund firm Tourbillon Capital, is preaching patience. 

The firm's flagship Global Master fund has lost money in 2017. And in an October letter to investors, Karp leads with a quote from author David G. Allen. The quote reads:

"Patience is the calm acceptance that things can happen in a different order than the one you have in mind."

The firm's global master fund had a net return of -1.3% in the third quarter, according to the letter, and is now down about -7.4% this year through October, according to a separate client update seen by Business Insider. The fund had been down about -5% after fees for the first nine months, a document shows. Its long-only fund was up about 10%.

In an introduction, Karp said the firm is seeing "a number of warning signs that point to the middle innings of frothy speculation." He cited:

• "The valuation spreads between growth (people are heavily overpaying for growth and quality) and value (one of the cheapest vs. growth ever)
• "The unprecedented inflows into illiquid assets (private equity, VC, art, wine, etc.).
• "The 500% appreciation of Bitcoin and the dozens of "cryptocurrency" hedge funds that have all launched in the last six months,
• "The amazingly low volatility perpetuated by investment vehicles that sell volatility to enhance what is already the lowest yield environment in several thousand years."

These comments echo earlier letters, which have discussed the challenges of managing money in the current bull market.  In the October letter, Karp added that despite this, there are investment opportunities for those willing to look "ugly" for some period of time.

He cited examples of stocks which underperformed "for just long enough to cause abandonment (usually 18-months to 3 years)."

"Then with a little spark, there is a staggering, abrupt move," he said.

He cited Baidu, which gained 39% in the third quarter, and GM, which gained 43% in five months. And the letter identified a number of investment ideas: Fleetcor, Vantiv, Softbank, eBay.

"Although it feels as though there has never been a harder time to fight the consensus, remain low-net and avoid the all-too-easy trends, we also believe there has never been a more important time to have patience," the letter said. 

Fleetcor is up about 14.6%, Vantiv is up 8.8%, Softbank is up 11.6% and eBay is up 6.5% from June 30 through the morning of November 3, according to Bloomberg data.

Tourbillon had $2.7 billion in hedge fund assets as of mid-year, per the Absolute Return Billion Dollar Club ranking. It currently manages about $3.4 billion firmwide.

Before launching Tourbillon, Karp was a portfolio manager at Steve Cohen's SAC Capital and a co-chief investment officer at Carlson Capital.

This story has been updated to reflect updated performance numbers.

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Artificial intelligence has been around since the 1950s but is exploding in popularity recently, especially in the world of finance.

The idea that an investor can do a bit of programming, and then sit back to watch the profits roll in is an exciting idea, especially when it works. But according to a story by Adam Satariano and Nishant Kumar from Bloomberg, one hedge fund manager was initially scared by how well his AI trading machine worked.

"Were we scared by it? Yes. You wanted to wash your hands every time you looked at it," Luke Ellis, CEO of $96 billion hedge fund Man Group, told Bloomberg.

Ellis told Bloomberg that his firm developed a system that worked well and generated profits, but the firm couldn't really explain why it worked or made the trades it did, which is why they held off from rolling it out broadly. But, after several years a Ph.D. level mathematician at the firm decided to dust it off and give it a small portfolio to play with. Since then, the firm has been made the AI model a regular part of the family at Man Group.

It's worth reading the story behind the firm's trading algorithm from Bloomberg, as it tells the tale of an especially successful implementation of one of the hottest areas of tech right now. 

Artificial intelligence is an umbrella term for a computer program that can teach itself. Its power comes from its ability to "learn" the rules of the whatever it's tasked with without them being provided ahead of time. The best AI systems find rules and patterns that humans would miss by crunching huge amounts of data that would prove unwieldy for humans.

To understand this concept a bit better, think of a computer playing a game of chess. Chess is a finite world with a defined set of rules that a human can list for a computer ahead of time. There are a huge number of possible scenarios in a game of chess, but the number is finite and computer-crunchable.

Artificial intelligence systems are not given the rules ahead of time. Instead of listing the rules of chess, a computer using AI would simply be told to watch a huge number of chess games being played and figure it out. After enough matches, the computer would learn the rules of the game and be able to go head to head with a human player. That's exactly how Elon Musk's AI company beat a human in the incredibly complex game of Dota 2 recently.

In the world of finance, data points like shipping routes, weather and investor sentiment can all affect the markets. A human could never program all the rules that affect the markets because those rules are hard to define and almost infinitely numerous. But, they could feed a computer a huge number of data points and tell the computer to figure it out, which is largely what Ellis and his firm did to program their AI machine. He told Bloomberg that he gets pitched new data sets all the time because of this.

AI systems are coming into vogue now because the technology used to crunch these huge data sets has finally caught up with traders' ambitions. Companies like Nvidia and AMD are developing new computer chips that are fine-tuned to run AI systems, and Nvidia's CUDA software platform is helping researchers run their programs even faster.

AI doesn't mean the end of human traders though. Some over-exuberant trading programs are suspected to have caused a stock market flash crash in 2010, according to the Bloomberg story. Ellis and his team have successfully used artificial intelligence to improve returns in their firm, but it's not run entirely by the robots yet. 

Regardless, AI is taking over the world of finance. There will be winners and losers, but it's probably here to stay.

Click here to read the full Bloomberg story

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• Manoj Narang, who launched quant hedge fund MANA Partners earlier this year, has launched a subsidiary that's developing financial products based on trading data.
• Bank of America is using the firm's simulating tool to test its algorithms and make sure they comply with new regulations in Europe, called MiFID II. 
• Mana's move is an example of a broader trend, as high-frequency trading firms seek new ways to use their expertise to expand business, and investment banks look to partner with tech savvy upstarts. 

Manoj Narang, founder of quant hedge fund MANA Partners, has launched a trading subsidiary that is developing market-testing products. One of his first clients: Bank of America Merrill Lynch. 

Narang, who previously founded high-frequency trading firm Tradeworx, quietly launched the subsidiary, MANA Tech, last November. The firm is developing a range of products. One is a simulating tool that allows financial firms to run their algorithmic trading strategies through previous market conditions. The tool allows traders to test whether their algorithms are safe and how they will affect other traders. 

Bank of America is one of the first users of the product, according to people familiar with the matter. The bank is beta testing the simulator ahead of the rollout of European regulation, called MiFID II, next year. The new regulation, which goes live in January, intends to prevent traders from causing unintentional market chaos, such as the Flash Crash in 2010, among other things.

The law puts more responsibility on buy-side and sell-side firms to monitor their trade execution decisions – leading to more scrutiny from regulators, according to JWG, a regulatory compliance advisor.

Narang declined to identify other clients but said that other banks and exchanges are evaluating signing on. A spokeswoman for Bank of America declined to comment.

MANA Tech is also marketing a product using similar data that allows investors to measure how much money their algorithmic strategies would have performed in past market conditions, and identifies how they could become more profitable.

The move is part of a larger trend, as high frequency traders seek new ways to make money amid a market that has presented fewer opportunities, Business Insider has reported. And investment banks are increasingly partnering with firms that have already built high spec tech, as they look to cut costs and avoid having to replicate it in-house. 

"Quantitative trading whether, it's statistical arbitrage or high frequency trading, is becoming more and more about technology," Narang said.

"It's much more beneficial to be a quant trading firm where technology is a profit center and not a cost center. It allows you to spend much more on your technology than you can with the traditional setup where technology is a tax on trading profits," Narang added. "The most successful quantitative firms going forward are going to have that philosophy."

The subsidiary has raised external money via Series A funding, and is gearing up to do Series B funding round, Narang said. He declined to identify the external investor. 

Narang declined to say how much his hedge fund firm manages. As of February 1, the firm managed about $777 million in regulatory assets, according to an SEC filing. Regulatory assets give an idea of a fund's size but do not indicate actual assets under management, since it includes leverage – or borrowed money – and long and short positions, among other things.

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NEW YORK (Reuters) - Leucadia National Corp has doubled down on hedge fund firm Folger Hill Asset Management LP with a new approximately $100 million investment, according to a person familiar with the situation.

The recent cash infusion by Leucadia, the parent company of investment bank Jefferies Group, adds to its already $400 million bet on Folger Hill, launched in 2014 by former SAC Capital Advisors Chief Operating Officer Solomon “Sol” Kumin.

The new money comes at a good time: the firm’s main stock-picking hedge fund, Folger Hill Partners LP, is up about 4.5 percent this year through October, according to another source who requested anonymity because the information is private.

That is far better than its losses of 3.2 percent and 17.5 percent in 2015 and 2016, respectively.

Boston- and New York-based Folger Hill’s assets also appear to have stabilized.

Kumin initially raised about $1.1 billion, but capital managed by the firm’s U.S. unit declined to approximately $600 million as of December 2016. Folger Hill’s U.S. division currently has about $750 million, including the new Leucadia capital, according to one of the sources.

An Asia-based unit that is run in partnership with private investment firm Schonfeld Strategic Advisors also has about $250 million under management, half of the $500 million that can be drawn from Leucadia and Schonfeld’s commitment to the division.

Leucadia had previously looked for an additional equity owner for Folger Hill in an effort to diversify its investor base.

But the sale process has stopped given the fresh capital outlay, according to one of the sources.

Folger Hill’s U.S. business has 11 portfolio managers, according to the source, down from 17 at the start of 2016. Folger Hill Asia will have 11 portfolio managers in Hong Kong and Singapore by January, according to the same person, up from five in December 2016.

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• Hedge fund Light Sky Macro launched earlier this year with the backing of Steve Cohen, Dan Loeb and a number of other hedge fund managers.
• The fund had a rough start but is now in positive territory.
• The fund was started by Ben Melkman, a former partner at Brevan Howard.

NEW YORK – Things are looking good for Ben Melkman's Light Sky Macro.

After a rough start earlier this year, the macro hedge fund is posting slight gains and raising more money – double what it had about six months ago.

The hedge fund gained 0.59% after fees since launching March 1 through September, a person familiar with the returns told Business Insider. It means the fund has recouped early losses — after dropping about 3.5% from March through the end of April.

Light Sky Macro has quickly raised assets and is currently managing $1.7 billion, the person added. That's about double what the firm managed at the end of April.

Light Sky had expected to launch on March 1 with about $400 million before scaling up. The firm is now what the industry calls "soft-closed," meaning that the fund is not actively seeking new investors but allowing investments from existing relationships.

Some of the biggest names in the hedge fund industry backed Light Sky Macro, including billionaire Steve Cohen, Third Point's Dan Loeb and Moore Capital's Louis Bacon, Business Insider earlier reported.

Melkman previously was a partner at Brevan Howard Asset Management, a Europe-based hedge fund titan that has been losing assets.

Macro funds are down about 0.4% for the year through September, per data tracker HFR.

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• Billionaire hedge-fund manager Bill Ackman lost his bid to get three of his own candidates on the board of ADP, the human-resources company.
• The vote came after a three-month testy back-and-forth between the activist investor and ADP.
• Ackman says that despite the loss, he and investors in his fund, Pershing Square, have actually won in the long-term.
• "What our investors want us to do is make them money. We've made them money so far in our investment in ADP," Ackman told Business Insider.
• The stock price has improved since Pershing Square got involved with ADP, which has translated into about $300 million in gains for his fund, he said. And he'll continue to have influence on the stock.
• ADP is essentially a win-win no matter what, Ackman said. 
• Ackman said his loss won't change his strategy – and that activism hasn't changed.

Bill Ackman's Pershing Square lost its bid Tuesday to appoint three nominees to the board of Automatic Data Processing, the human-resources company. But according to Ackman, he also won. 

Pershing Square in August disclosed an 8% stake in the company that handles many Americans' paychecks. Tuesday's vote capped a testy three months that included, among other things, insults slung from ADP's CEO, Carlos Rodriguez, and rival hedge fund managers alike. 

Ackman has contended that ADP, though it has performed well, could perform better, and deliver gains to his fund and other shareholders alike.

Overall, he's optimistic about ADP, despite the proxy loss. ADP's stock price has improved since Pershing Square made its presence known, to the tune of some $300 million in gains, he said. And he's confident ADP will act to make changes that his firm suggested, bringing on more gains. A win-win, so to speak.

Regardless, times have been tough for Pershing Square. An infamous long-term bet against Herbalife failed to produce gains, for instance, and assets at Pershing Square have dropped by $1.6 billion in the past five months, Business Insider earlier reported. A proxy fund for the firm is down about 3.3% after fees for the year through October, meanwhile.

We caught up with Ackman after the vote Tuesday to get his take on his strategy on ADP and activism going forward.

Rachael Levy: I wanted to know what happens to your strategy on ADP going forward? How does this change your strategy, if at all?

Bill Ackman: It doesn't change our strategy at all. The company has tried to characterize this as a major win for the company. It's actually a major win for the shareholders.

The company has tried to characterize this as a major win for the company. It's actually a major win for the shareholders.

So I got 31% support from shareholders out of the votes cast for my seat on the board, not including another 14% that were withheld from the guy I ran against. Because ISS, the proxy advisory firm, said, "Support Bill by withholding votes from Eric Fast." So looked at correctly, I got 45% support from shareholders for my candidacy in the board. It's not a win, but it's a major minority, or just shy of majority vote, for the board.

Shareholders throughout the contest totally supported our view that this company should be operating much more efficiently and should address the problems it has in its enterprise segment.

In order to win this contest, the company had to come out publicly and make statements about improving their margins, improving their competitiveness, about accelerating growth on the back half of next year. We're going to monitor the company very carefully. And now the ball is in management's court. Will they deliver on the promises they made to shareholders? And if not, nine months from now we nominate another slate of directors.

Levy: What happens to the $500 million you raised for this position?

Ackman: That capital is committed for four-and-a-half years. We're a long term investor in the company and we have no plans to meaningfully change our position.

Levy: What did you learn from this experience? Would you have done anything differently?

Ackman: The thing that hurt us a lot is that ISS did not support all three of our candidates like Glass Lewis and Egan Jones did. They recommended a very unusual way for shareholders to support my election to the board, which was to withhold votes for Eric Fast. That's ultimately what cost us the election.

Had I had known that was a possibility, I probably would have just run one candidate myself. It was a very simple decision – do they want to vote in favor? It almost becomes a referendum on our idea and there's no need to go through the gymnastics of withholding for one director to support me on the board. That, I would say, is the biggest takeaway from this experience.

Levy: Let me make sure I understand this. So instead of proposing three board members, you'd have proposed only one?

Ackman: Well, had I known that ISS would, I was confident that we'd get support from the proxy advisor firms and we did. Except in the case of ISS, they said, support Bill for the board, but do it in a backhanded way. Do it by withholding support from one of management's nominees. Those 14% of shareholders that voted that way, that withheld votes, were 14% of votes that I didn't get. That's what hurt our candidacy here.

But look, the unaffected price here before us, the stock was $97 or $98 a share. Today it's $112-plus. We own the economics of 33 million shares in the company. We're up a lot of money, $300 million or so in our investment in the company. That's a good start.

Levy: What other options do you have now? You mentioned the proxy vote in nine months. Is there anything else you can do as an activist?

Ackman: The ball, as I said, is back in management's court. They've committed to address the issues that we've identified. They already have plans underway to address these issues. So the question is are they going to address these issues or not? If they don't deliver for shareholders, next year we'll get the support we need to get on the board of the company. If they're successful, and we hope they're successful, the stock should go up a lot. So either way, we win.

Levy: And how are you going to approach activist positions going forward?

Ackman: The same way we always do. Again, we run very few proxy contests. The last proxy contest we ran was for board seats at Canadian Pacific. If we have to run another proxy contest, we will in the future.

One of the things that hurt us in this contest is the stock has done well. I don't think anyone's ever run a proxy contest with a stock as up as much as ADP before. And I think we've shown with the amount of minority support we got here that shareholders will support an activist in a case even where the stock has done well if  there is a significant chance of improvement.

ADP stock has done well over the years, therefore it's not a natural target for an activist. But over the last three months, we've explained why this is a target, because the company has huge potential for improvement.

What our investors want us to do is make them money. We've made them money so far in our investment in ADP.

Levy: Going forward, are there any new positions you can announce today?

Ackman: No.

Levy: More broadly, this is more of a philosophical question about the nature of activism, do you get the sense that activism has changed? Is it any different today in this raging bull market?

Ackman: I don't know that it has. Look, I'll point out the following which I think is something that isn't well understood. Activism isn't about winning proxy contests. It's about making money for investors by getting companies that aren't achieving their potential to achieve their potential.

Activism isn't about winning proxy contests. It's about making money for investors by getting companies that aren't achieving their potential to achieve their potential.

Proxy contests are one of the tools in the activist tool kit to motivate a company. We used that tool here, we were forced to, it wasn't our first choice. But we were forced to.

It has had the intended effect, OK? The ADP management team and board are going to be very motivated over the next nine months to deliver for shareholders. They know they have a major owner of the company who is watching everything they're doing and they have a much more educated shareholder base.

So it's a completely different company today and that's what creates an interesting opportunity.

Levy: With stock market highs as they are, does that make it harder to win support from investors?

Ackman: No. I think the facts are specific to every company. We were always viewed as underdogs here because ADP stock has done well. The fact that we got 31% support of shareholders, not including the 14%, shareholders that voted against Eric Fast to support me, is a very powerful indication.

By the way, we also got the support of the second largest shareholder of the company.

Levy: Was that BlackRock or Vanguard?

Ackman: BlackRock.

Levy: More generally, back to this broader question, do you think activists wield the same power when the market is this high?

Ackman: If activists have good ideas, they will get one of two things, they will get support from shareholders or companies will be pushed to address the issues that an activist identifies.

Levy So essentially, yes, they should have the same power they had previously.

Ackman: Bear in mind, ADP is the second biggest company ever for an activist to take a position in.

Levy: Right. What is the significance of that?

Ackman: The bigger the company, the more difficult the target, typically.

Levy: One other thought I had on this, this was an interesting campaign in that ADP was fairly active in speaking out. The CEO went on major news networks often, as well. If companies that activists target have advisors talking them through activist defense, counter communications campaigns, that kind of thing, does that make it so the lower hanging fruit of investments have been picked off? Does that make your job harder, essentially?

Ackman: Look, if every company in America is run efficiently, that's not good for activists. That's good for Americans, but not for activists.

Look, if every company in America is run efficiently, that's not good for activists. That's good for Americans, but not for activists.

We do very few of these, maybe one a year, and they're not usually proxy contests. I think we can find one or two interesting ideas a year. That's all we need to make a living.

Levy: Could you speak about overall stock market valuations?

Ackman: I'm not an overall stock market prognosticator. I'm the wrong guy for that question.

Levy: Back to ADP specifically, why go after a company that has been doing well over a company that could use a bigger boost?

Ackman: The gap where they could be and where they are is extremely wide. Because the company is in a good industry, there are good tailwinds, so that we do well, even if we are to fail as an activist, we'd still make money as an investor.

Levy: Bill, thank you so much for taking the time. Is there anything else that you think we should add, or that I didn't get to ask you that you think we should consider?

Ackman: The press is very focused on, they think of an election like a presidential election. This is very different. In a presidential election, the person who loses has no influence going forward. In an activist campaign, even if the shareholder activist loses if you will, I continue to be a shareholder of the company. The company has committed to make a significant number of changes and improvements on the business. And we get to monitor their progress and in nine months from now, we can put another slate of directors if we choose to.

Levy: So the fight continues on.

Ackman: It's the end of the beginning, OK? We're still in the very early innings but we're off to a good start. The stock is up, call it almost 15%, from the unaffected price.

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• Billionaire hedge-fund manager and GOP donor Paul Singer sent a letter to clients stressing the need for economic growth. He also laid out why the US needs tax reform.
• Republican lawmakers are planning a vast overhaul of the US tax system.
• Singer was among the leading Republican critics of Trump during his campaign, and a website funded by Singer was reportedly involved in funding opposition research from a firm that later went on to produce the notorious Trump-Russia dossier.

Elliott Management, the hedge fund led by billionaire conservative donor Paul Singer, laid out in a private letter to clients why the developed world needs more growth to maintain social stability.

"The developed world needs more growth and a healthier balance between asset prices and middle-class employment opportunities and prospects," Elliott said in a quarterly letter to clients, which was seen by Business Insider. 

The letter added:

"Only more development can generate a reasonable prospect of paying the ever-mounting bills, and lower the temperature of the growing societal edginess regarding economic security and “inequality.” Growth is essential to fostering the sense of community and buy-in that are needed for social stability, the acceptance of the notion of private property, and the marginalization of fringe political parties and leaders. The clock is ticking (or is it a time-bomb?)."

Elliott cited a number of statistics on the US economy, saying that only 41% of high school dropouts are currently working, and that 15% of men aged 25 to 54 are out of work, versus 5% between 1945 and 1968. 

"This has been an emergency for a long time, but it has not been addressed as such," the letter said. "Many policymakers appear to feel that printing more money and keeping interest rates low, plus extending and enhancing benefits of all kinds (health care, student loan forgiveness, etc.), is good enough."

The letter makes a case for US corporate tax reform, saying the "world is ever competitive" and "the historical assumption that customers will pay more for U.S. goods and services because they are 'better' is long gone."

"The case for domestic tax reform (really, tax cuts) is not quite as clear, but it is nonetheless powerful," the letter added.

"The tax cuts would be additionally helpful if they led to lower governmental spending, but good luck on that front," the letter added. "Our view, considering the entire landscape, is that individual tax cuts would be an important catalyst of faster economic growth, and would help restore the balance between capital and labor."

Republican lawmakers have released a tax plan that, if enacted, would be the country's most sweeping tax change since the 1980s. Democrats charge that the plan would largely benefit the wealthy. 

Elliott cautioned against raising government deficits, meanwhile. Here's the excerpt:

"At present it appears that both political parties in the U.S. are (more or less) in favor of, or at least willing to accept, increased federal spending and higher deficits. ... It is likely, based on the current state of play, that the tax legislation that may emerge from the Congressional “meat grinder” will deepen the spending/revenues deficit even after taking into account the expected increase in growth (and hence increased tax revenues) that tax rate cuts may create. While there is no “right time” to change profligate government spending, it is also true that kicking the can down the road (with ultimately unsustainable deficits) is a path to ruin."

These are issues that Elliott has previously brought up, particularly tax reform, which the firm has detailed in previous client letters. 

Singer was among the leading Republican critics of Trump during his campaign, though he later donated to the president's inaugural fund and has made multiple visits to the White House.

A conservative website funded by Singer was reportedly involved in funding opposition research from a firm that later went on to produce the notorious Trump-Russia dossier. And Steve Bannon, the former White House chief strategist and current Breitbart News executive chairman, says he is now on a mission to destroy Singer, who runs $34 billion fund Elliott Management, according to Axios. 

As of October 1, Elliott managed $34.1 billion, per the letter.

A spokesman for Elliott declined to comment.

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• Republican lawmaker Kevin Brady introduced an amendment that would alter a long-standing tax provision called carried interest — and could raise taxes on Wall Street managers that keep holdings for less than three years. 
  
• Brady said the change would prevent hedge-fund managers from taking advantage of the tax benefit, but they aren't the Wall Streeters using it.
• Currently, carried interest allows investment managers to have capital gains taxed at a lower rate than normal income tax if they hold the holding for at least one year. It's a big benefit for private-equity funds and other long-term investors.
• Very few hedge funds actually take advantage of it because they trade in and out of investments much more frequently.
• Other politicians have also confused the issue. Democratic Senator Tammy Baldwin called to end carried interest in regards to hedge-fund managers.

An amendment to the Republican tax bill touted as a blow to hedge-fund managers isn't going to affect most of them. 

Earlier this week, Republican Representative Kevin Brady, chairman of the House tax-writing panel, offered to make changes to the rules on carried interest, a tax provision that largely benefits private-equity funds and other investors that hold their investments for more than one year. President Trump and his then-competitor Hillary Clinton both called to ending carried interest during their campaigns.

Brady's amendment raises the threshold on what can qualify as a long-term investment and be taxed at a lower rate. He wants investment managers to have to hold onto something for three years before the can get the benefit, up from one year now. The Ways and Means Commmittee, which he chairs, tacked on the amendment to the tax bill Monday.

In an interview with CNBC on Monday, Brady said increasing the holding limit "makes sure you don't have the giant hedge funds sort of spinning in and out of that...It puts [carried interest] back to its original intent, which is to reward over long term holdings, those who put skin in the game and work to make the skin in the game better."

But carried interest actually doesn't apply to most hedge funds. In a statement from the Ways and Means committee, which Brady chairs, a spokesperson said: "The Tax Cuts and Jobs Act will encourage and reward long-term investment while also applying equally to all sources of growth capital – no matter if that investment is provided by hedge funds, private equity, venture capital, or otherwise."

Currently, hedge-fund, private-equity, real estate managers and other investors like venture capitalists qualify for the lower capital gains rate if they hold an investment for one year. Those capital gains are then taxed at a maximum 23.8%, compared to a top rate of 43.4%. This is a huge tax break for the Wall Streeters who qualify.

What the data says

Already, few hedge funds benefit from the current carried interest rules. The majority – 62% – hold their investments for less than one year, according to data from eVestment. And only a relatively small number of hedge funds would be caught up in Brady's amendment if passed. Only 15% report holdings for more than two years, according to eVestment.

Brady's rule also would not affect the vast majority of private equity managers. The average holding period for private equity funds this year is 5.3 years – more than two years above Brady's limit, Preqin data shows. Seventy-seven percent of private equity deals are held for more than three years, meanwhile, according to Preqin. 

If anything, the current carried interest rules are most likely to help private equity funds – not hedge funds – since only 3% hold their positions for less than a year, according to Preqin.

"Three years is likely to be ineffective," said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.

As for venture capital, since 2000, 52% of venture-capital positions have been held for more than three years, according to data from PitchBook.

Talk about carried interest in regards to Wall Streeters is irrelevant given there's another provision in the proposed GOP tax bill, on pass-throughs, which could cut fund managers' taxes by huge amounts, according to Josh Bivens, research director at  the Economic Policy Institute. The proposed rule would allow businesses to cut their top tax rates from 39% to about 25% by reorganizing how they're structured, Bivens said.

To be sure, Brady isn't the only politician to confuse who is affected by carried interest. In a letter Wednesday to the Senate Committee on Finance, Democratic Sen. Tammy Baldwin wrote: "This change will not affect the majority of partnership investments, which are longer than three years."

But, she pointed to "wealthy and powerful hedge fund managers" in calling to end carried interest.

With assistance from Bob Bryan

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• Elliott Management, one of the world's largest hedge funds, with $34 billion, told clients the ingredients for a market crash were all in place.
• The hedge fund was founded by billionaire Paul Singer, a big GOP donor.
• The firm has been prepping for a significant market event — raising $5 billion in about 24 hours earlier this year.

"Markets are in a kind of dreamland."

That's according to Elliott Management, which manages $34 billion and is one of the world's largest hedge funds. The firm, led by billionaire GOP donor and hedge fund manager Paul Singer, says markets are at high risk, partially because of super-low interest rates, according to a third-quarter client letter seen by Business Insider.

The stock market has been raging, with the S&P 500 hitting new highs Wednesday.

"The current 'stability' is not sustainable," Elliott wrote. "Monetary policy has been extraordinary, and the end of this period of its policy ascendancy and the consequent levitation of asset prices, whenever it occurs, will likely be commensurately extraordinary."

Elliott says it doesn't know when markets will turn, and to be sure, the firm has been warning about some kind of market chaos for some time. Earlier this year, the hedge fund raised $5 billion in about 24 hours from investors to put money to work, expecting "all hell to break loose."

In the most recent letter, Elliott laid out the "historical recipe for a crash":

• "ominously overpriced assets financed by too much debt;
• "a tightly wound matrix of highly leveraged trading positions;
• "technical or situational accelerants (in 1987, 'portfolio insurance; today, all kinds of negative gamma strategies, the false liquidity of ETFs, volatility selling, massive leveraged bond ownership at the highest price for duration in history, financial institution balance sheets that remain completely opaque and highly leveraged)."

Elliott said (emphasis added):

"This kind of history is not a blueprint, and certainly many of these 'recipe' elements appeared well before 2017. But we think history is NOT bunk, and that markets are in a kind of dreamland. If and when they wake up, investors and traders may not like what they see. It is not far fetched to imagine the widespread and tightly-held assumptions of millions of investors being smashed like pumpkins in a future (actually, 'back to the future') environment."

Elliott also pointed out specific concerns for the bond markets:

"If economic growth, appearing to tilt ever-so-slightly upward now in Japan and Europe, and growing steadily but slowly in the U.S., actually accelerates even a modest amount, if demand for commodities increases, and if such environment causes wages and prices to rise, one could envision a severely negative impact on global bond markets."

Elliott managed $34.1 billion as of October 1, the letter said.

The firm is barely beating competitors in performance this year through the end of September. The Elliott Associates LP fund is up 6.8% after fees, and the Elliott International Limited fund is up 6% after fees this year through the third quarter, according to a client note reviewed by Business Insider.

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• Ilana Weinstein is the founder of The IDW Group, which focuses on recruiting investment talent for all kinds of investment strategies.
• We asked Weinstein about the biggest trends in the hedge-fund business and how to get a senior-level job today.
• "As the industry has become more crowded and efficient, I would argue the definition of talent has gone up," she said.

Ilana Weinstein is a force within the hedge-fund industry, recruiting senior investment talent and C-level staffers for some of the biggest funds. Her firm's approach has gotten a reputation for being the "Don't call us, we'll call you" search firm — something Weinstein is completely fine with.

She founded The IDW Group about 15 years ago. The New York firm recruits investment talent specializing in all kinds of investment strategies, ranging from long-short equity to credit and macro. IDW also recruits for private-equity funds, asset managers, and family offices.

We wanted to get a sense of what it takes to get a top job in money management, and we reached out to Weinstein to get her two cents. She emailed us back with her thoughts. Following is a lightly edited transcript.

Rachael Levy: You are coming up on your 15th year since founding IDW. How have you seen this industry evolve?

Ilana Weinstein: When we started, in the beginning of 2003, the hedge-fund industry was still relatively nascent. There were 3,000 hedge funds compared to 9,000 today. AUM [assets under management] was $500 billion versus $3.4 trillion. That’s explosive growth. Talent doesn’t proliferate like that.

Back then, proprietary trading desks on the sell side were where we went for talent because they were like mini hedge funds and there weren’t enough developed hedge funds to pull from. After the crisis, prop trading became a "no-go" zone at the banks and anyone who was a risk-taker (and any good) left.

Today the war for talent is largely hedge fund to hedge fund, and as the industry has become more crowded and efficient, I would argue the definition of talent has gone up.

There is less alpha in the market, less volatility, less dispersion, and more market participants. If you get five consumer portfolio managers in a room with 20 ideas each, you don’t get 100 ideas. You are lucky if you get five to six. There aren’t enough factors to make 80% of hedge funds do well.

The list of truly investable hedge funds is probably 2% of existing funds. And concentration of AUM reflects this: 10% of hedge funds control 90% of the AUM. That’s a surprising statistic to a lot of people. It also means seismic changes can happen quickly.

We’ve seen big institutional funds like Eton Park and Perry shut down; other large players have had enormous and swift AUM drops. This leads to a recalibration of who the best funds are, and where talent wants to be.

Levy: What is your approach to recruiting?

Weinstein: Think of a Venn diagram with one bubble being best-in-class, stand-out talent, and the other being miserable, disenfranchised players whose résumés are papering the street. We have never cared about the second bubble. We are not in the business of helping people find jobs. The niche IDW has cultivated is to help the best funds attract exceptional talent. We only go after that first bubble. If there is overlap, it's a happy coincidence.

Levy: What are some recent trends you have seen with regard to talent?

Weinstein: We are all about, and only about, cultivating the most talented people in our industry.

Historically, the overlap between those two bubbles was low; as you might expect, talented people sat at what they thought were the best funds and were not receptive to leaving. This made our job difficult because we were only as strong as our ability to create an opportunity that didn't exist where they were.

Now many people are telling us how frustrated they are — so that overlap in my Venn diagram has never been greater. It feels like we at the center of a perfect storm.

It feels like we at the center of a perfect storm.

Even if fund performance is better this year, we are still coming off the back of three to four years where these people outperformed the funds in which they work. If you have multiple years of profit and loss where you were the bulk of your fund’s return — sometimes in its entirety — and then have compensation netted by poor performance in other parts of the fund, you start to question the value proposition.

These last few years have given these investment professionals more experience and confidence and made them more willing to bet on themselves. I recently interviewed someone who referred to this as “labor arbitrage” — his view of how he was being taken advantage of at the fund in which he sits. The risk-reward dynamic of staying and leaving changes. Funds that have the resources and forward-thinking-ness to seize this moment are going to pick up the best people in our business.

Levy: How would you describe the current hiring environment?

Weinstein: Robust! All the doomsayers in 2016 who predicted industry AUM would fall by some big percent were dead wrong. The industry has never managed more capital that it does today. That is the yardstick of health for our business.

However, LP patience is thin, and we are going to see more funds — big ones — shutter or become family offices. There will be a shakeout in this industry, and there should be. Yet overall AUM is growing, so that means those that remain will get bigger and there will be space for new entrants who can build something unique.

That said, you need to be rich to start a hedge fund now, to build something attractive to institutional LPs. The industry is moving to greater scale and more sophistication. Those that can leverage scale and invest in people and systems to drive opportunities will win.

Levy: So if once upon a time the natural progression was to leave and start a fund but that is tougher now, where do these talented people go?

Weinstein: The best platforms are becoming more creative and bespoke about how they attract talent. I liken it to a managed account for an LP. There are accommodations made for someone truly unique — maybe more flexibility with risk parameters, concentration or the ability to invest in privates. More capital out of the gate — resources to build and train a team.

And then economics to take a lot of the risk off the table in the near term and unlimited upside longer term. If the choice is go at it on your own — bang the tin cup for capital, have a never-ending series of marketing meetings — and even if things go well still spend 20% to 30% of your time marketing because there is a natural 10% attrition of capital every year, and on top of this fund this enterprise out of your pocket until you break even (if you ever do) versus be plug and play somewhere, which will give you incredible resources, why take that risk?

And just to underscore that point, we are helping platforms gobble up small funds because the economics and time allocation of marketing versus investing no longer makes sense for these smaller guys.

Similarly, funds that have a real partnership are interesting. “Partner” is an overused and often meaningless title in our industry.

'Partner' is an overused and often meaningless title in our industry.

I can’t tell you the number of partners we meet, from big funds who can barely articulate what it means beyond looking good on their business card. Giving someone small points and then a “jump ball” for more is still a discretionary compensation model, in my view. It’s a convoluted way of saying the same thing. Once you get to a point where you are ready to do your own thing, you want to build something or having a meaningful stake in doing so.

The best platforms get you there as do funds with a real partnership and culture of meritocracy. We recently took a senior guy out of a firm he had been at for 14 years. He left because the founder created a role around him that leveraged his ability to build a business and mentor a team. Joining a $30 billion fund as a partner with a clear path on how to grow that stake and work directly for a founder who is brilliant at what he does and always expanding in ways that complement the fund’s strengths is exciting.

Levy: What has most surprised you in 15 years of interviewing the best people in this business?

Weinstein: How hard it can be to get them to make a move! Even now where they are the most receptive because of this disconnect between their performance and that of their fund, I still see the economic loss-aversion theory at play. These are people who are the most talented at taking risk for a living and yet when it comes to assessing their own career they have an inherent bias to weight the risks of a new opportunity over what they are likely to gain.

It’s amazing how lopsided their thinking can be, but luckily they are also highly rational, so once they wrap their head around what they are doing they can make the leap.

Levy: What is the most misunderstood aspect of the hedge-fund industry by hedge-fund investors?

Weinstein: Four things.

• How lean these investment teams are. You can be a $10 billion-plus fund and have a team of five to 10 people if it’s a single-strategy fund. That means it is critical that everyone contribute in a meaningful way, but that is often not the case.
• The strength of investment teams is lumpy. You may say so what but when the team is lean it matters. This is obfuscated when fund performance is good because everyone is happy and doing well and there is less individual accounting going on. Over the last few years returns were more challenging and it became clear who the stars are. If they leave it’s a problem.
• Right now many talented people are unhappy and in-play LPs should know the hedge-fund industry is like a giant Jenga puzzle. All you need is a few key people to leave, returns drop, and the whole thing comes crashing down. If I’m an LP, I want to know who is key on the team and likelihood of them leaving. I don’t think anyone has this bird’s-eye view but us.
• "Turnover" is not a bad word. Founders are often afraid of letting people go because of the perception of turnover by LPs. LPs should encourage founders to prune their team. This also makes room for talented people to grow and not be as vulnerable to our call. The key is for LPs to diligence who drove the turnover (founder or the person who left) and what the reputation is of the person leaving. The story that gets spun after the fact is often not the reality.

Levy: What do you think investment professionals in this industry most underestimate about themselves?

Weinstein: How difficult the transition is from analyst to portfolio manager to founder. These are different skill sets and people overrate their ability to make these transitions. An analyst is an idea generator. Once he becomes a portfolio manager he is no longer deploying capital through the lens of the founder. He is now responsible for portfolio construction, sizing, and hedging. The buck stops with him. I can’t tell you the number of people who don’t fully appreciate this ahead of time and flame out. As a founder you are building a team, running a business and dealing with LPs. There is little about an investment professional’s training that prepares him for this.

My second point is one I see talent becoming savvier about and that is how quickly things can change. Now that they have seen several large funds shut down and others struggling, there is more awareness about asking the right questions about where they sit.

Just because it’s a big, brand-name fund that doesn’t mean it is a stable seat. They need to look around and ask: "Are our returns differentiated? Are talented people likely to leave? Is the founder committed to investing in people, resources, and technology — effectively the future? Or is he just resting on his laurels?" That’s the kind of stuff we help people see through. Inertia is a killer and it’s a shame for a talented person not to be everything he can because he doesn’t have broader perspective.

Levy: What is critical for founders to know to hang on to their best people?

Weinstein: Founders need to provide their people with four things.

1. Impact: Their people need to feel like they can impact the bottom line. Even if the founder is the ultimate arbiter of how capital is deployed, if he has the right team they should be able to influence these decisions in a material way.
2. Transparency: Clarity around how they are measured; what they need to do to progress; why and how capital gets allocated. This is a pay-for-performance culture, and people need to feel connected to the results of the fund as well on their own trajectory.
3. Scope: Measured by remit and access to capital. As people progress they want to do more — maybe it’s a sector PM who now wants to expand to other sectors. Founders need to find a way to let talented people develop, or they will lose them.
4. Compensation: Obviously an important one and you need to know the market and be in line with that but if the above three are in good shape this one usually is too. It’s also the easiest one for a founder to fix.

Levy: What advice would you give to a young person coming out of school who wants to join a hedge fund? What kind of educational background are funds looking for now?

Weinstein: Focus on what lights you up — not the dollar signs. There are thousands of hedge funds, and most won’t make it.

There are thousands of hedge funds, and most won’t make it.

It’s like the dot-com bubble when I was coming out of school. Unless you live and breathe investing and everything that goes on in your area of interest, this is not for you. What I am most inspired by is passion. This manifests itself through someone who is on fire about what is evolving in his industry, sector, how committed he is. I know it when I see it.

I wouldn’t worry much about majors. School is a time to expand your horizons and learn how to think. That skill set and flexibility will serve you better as an investor than any individual class. I have had a few founders disparage the value of an MBA. They would rather the person spent those two years in an investing seat going through different markets. As an MBA myself I am mixed on that, but I understand the point.

Levy: What career advice would you give in general?

Weinstein: Always work harder than everyone else so you know you gave it your all. Very few people consistently put in 110%. It takes discipline but it’s worth it. It goes to the concept of grit too. I always tell my 13-year-old: "Being smart doesn’t count for much unless you pair that with exceptional effort." I didn’t have much growing up — I went to Stuyvesant High, which fostered an immigrant survivor culture — there was no safety net. No one was going to help me so I had to do it myself. That sense of needing to make it work also builds confidence because you see what you can do on your own and overcome.

That sense of needing to make it work also builds confidence because you see what you can do on your own and overcome.

It gives you the confidence to take risks. I wouldn’t be where I am if not for that set of experiences.

You also have to keep moving forward and not take things personally. I deal with a lot of colorful and sometimes intense personalities. I won’t deal with bad people, but other than that I can pretty much handle anything! It sounds clichéd, but it is true. If things don’t go your way, pick yourself up and move on. You will learn from it and do better next time. Don’t get bogged down in negativity.

As my dad often said: "Don’t sweat the small stuff. It’s all small stuff." I have to remind myself of that sometimes because I care deeply about what I do, but dwelling on negative things is not productive.

Weinstein: What was the most formative moment in your career?

Levy: I was at a big search firm and thinking about starting my own company. I didn’t know if I could build a business but knew I was good at what I did. I asked a client if he worked with me because of me or the fact that I was part of a big firm. I don’t know if he knew what was behind my question but he said, “Ilana I don’t even know the name of your firm.” Of course he was being cute but it gave me the confidence to go for it.

Levy: Why are there so few women in investing seats, and what needs to be done to change that?

Weinstein: I gave a lecture on the hedge-fund industry at Wharton earlier this year, and one of the female students asked me that. I in turn asked how many women in the room wanted to join a hedge fund, and barely any hands went up. I then asked how many men, and about 70% of the guys raised their hands.

So there is self-selection going on which makes the pool shallow. You then factor in attrition, and by the time we get there we have very few talented women to pull from.

I can tell you, founders do want more women, but this is a meritocracy — they have a fiduciary duty to their LPs to hire the best possible person. If we had more women electing to go into the industry, we would have better numbers. It’s also a circular loop — women don’t see many female role models, so this dampens their interest. That being said, I do think there is something to this industry still being relatively young.

Look at law, medicine, banking, and consulting. They all have better female representation in senior roles. When I was at Harvard, the MBA class was roughly 30% female. Now I am told it is closer to 50%. So hopefully this is something that changes over time, but we have to do a better job of encouraging talented women to join from the get-go.

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Tech stocks have been on fire this year, and institutional investors have taken note.

According to data from Citi’s equity research group, tech stocks made up eight of the top 10 stocks held by the 50 largest hedge funds in the third quarter of 2017, with financials and healthcare close behind.

Despite the astronomic gains of stocks like Alphabet and Facebook, the aggregated Equity Hedge Fund Index has underperformed the the S&P 500 by 8.6 percentage points so far this year, Citi says. Hedge fund managers have also shifted away from less exciting sectors, like industrial stocks.

"Compared with last quarter, hedge fund top-10 holdings shifted away from Industrial and Utility names toward Information Technology, Consumer Discretionary and Materials stocks" writes Citi analyst Tobias Levkovich. "Additionally, hedge funds favored positions in ETFs and Energy in the third quarter while there was a decline in Financials, Telecommunication Services and Consumer Staples holdings."

Here’s the full list: 

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10. DowDuPont

Ticker: DWDP

Hedge fund holdings: 7

Sector: Materials

Market value (as of 3Q 2017): $161.96 billion

Year-to-date price change: +5.95%

9. Bank of America

Ticker: BAC

Hedge fund holdings: 7

Sector: Financials

Market value (as of 3Q 2017): $264.99 billion

Year-to-date price change: +18.42%

8. Apple

Ticker: AAPL

Hedge fund holdings: 7

Sector: Information Technology

Market value (as of 3Q 2017): $790.05 billion

Year-to-date price change: +46.18%

• Ilana Weinstein is the founder of The IDW Group, which focuses on recruiting investment talent for all kinds of investment strategies.
• We asked Weinstein about the biggest trends in the hedge-fund business and how to get a senior-level job today.
• Here’s her best advice for recent college graduates looking to land jobs at a hedge fund.

llana Weinstein, founder of the The IDW Group, is a tour de force within the hedge-fund industry.

She recruits top-level talent for the world’s most prestigious investment firms including hedge funds, family offices and private equity funds.

Weinstein recently sat down with Business Insider’s hedge fund reporter Rachael Levy for a wide-ranging interview about the industry. She says your college major isn’t actually that important when it comes to landing a dream hedge fund job after graduation. Instead, it all comes down to passion. Here’s more from the interview:

Rachael Levy: What advice would you give to a young person coming out of school who wants to join a hedge fund? What kind of educational background are funds looking for now?

Ilana Weinstein: Focus on what lights you up – not the dollar signs.  There are thousands of hedge funds and most won’t make it.

There are thousands of hedge funds and most won’t make it. It’s kind of like the dot-com bubble when I was coming out of school. Unless you live and breathe investing and everything that goes on in your area of interest, this is not for you.  What I am most inspired by is passion.  This manifests itself through someone who is on fire about what is evolving in his industry, sector, how committed he is. I know it when I see it.

I wouldn’t worry much about majors.  School is a time to expand your horizons and learn how to think.  That skill set and flexibility will serve you better as an investor than any individual class.  I have had a few Founders disparage the value of an MBA.  They would rather the person spent those two years in an investing seat going through different markets.  As an MBA myself I am mixed on that but I understand the point.

You can read the full interview with Ilana Weinstein here. 

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• Tourbillon Capital is a $3.4 billion New York hedge fund led by Jason Karp.
• Karp has been warning of "frothy speculation,"in the markets and has been preaching patience.
• The firm's flagship fund is down more than 10% for the year to November 17.

Tourbillon Capital, a $3.4 billion hedge fund firm led by Jason Karp, is suffering.

The firm's flagship Global Master fund is down 3.5% for the first 17 days of November, bringing performance for the year to November 17 to a loss of 10.6%, according to a note to investors seen by Business Insider. Its long-only fund was up about 10% through October, Business Insider previously reported.

In an October letter to investors, Karp preached patience, saying the fund saw "a number of warning signs that point to the middle innings of frothy speculation." Those comments echo earlier letters, which have discussed the challenges of managing money in the current bull market. 

In the October letter, Karp added that despite this, there are investment opportunities for those willing to look "ugly" for some period of time.

Tourbillon currently manages about $3.4 billion firmwide, including long-only investments. 

Before launching Tourbillon, Karp was a portfolio manager at Steve Cohen's SAC Capital and a co-chief investment officer at Carlson Capital.

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• Hedge funds are neglecting to protect against the downside in stocks, with one hedging gauge sitting close to the lowest in five years.
• These funds are also seeing a near-record concentration in a small group of outperforming tech stocks, showing a lack of diversification.
• The top five stock holdings among hedge funds right now are FacebookAmazon, AlibabaAlphabet and Microsoft, according to Goldman Sachs.
• At the same time, funds overall are faring worse than the S&P 500.

Hedge funds are supposed to offer a level of hands-on investment prowess that can't be found anywhere else. That's, theoretically, why they command higher fees for their services than traditional money managers.

But recent data from Goldman Sachs suggests that hedge funds are failing to differentiate themselves, and also neglecting their namesake characteristic: hedging.

Short interest — a measure of bets that a stock will fall, and often used as a hedging proxy — makes up roughly 2% of S&P 500 market cap. That's close to the lowest level in five years, according to data compiled by Goldman.

To further drive home the unabashed confidence being displayed by hedge funds, Goldman finds that they added net leverage heading into the fourth quarter. 

Funds now carry a net long exposure of 51%, above the historical average and the most since 2015, the firm's data shows.

It's the red-hot performance of tech stocks that has them particularly excited. And while hedge funds have made money hitching their wagon to the sector, they're not doing much else to encourage clients to continue forking over lofty fees.

The top five stock holdings in hedge funds right now are Facebook, Amazon, Alibaba, Alphabet and Microsoft, according to Goldman study of 804 funds with $2.1 trillion under management. These stocks headline the firm's so-called "VIP list," which has outperformed the benchmark S&P 500 by nearly eight percentage points in 2017.

Unfortunately, however, the average long/short equity hedge fund has posted a return of just 10% this year, trailing the 16% gain for the S&P 500. That suggests that these funds are struggling to pick winners outside of tech.

It might explain why they've become so reliant on the sector, and are going against another key tenet of hedge fund investing: diversification. The average hedge fund carries 68% of its long portfolio in its top 10 positions, which is just below a record high reached in early 2016. Further, the largest fund positions saw turnover of just 13% last quarter.

With all of that considered, the question must be raised: Why should you pay a hedge fund a hefty fee for market-trailing returns and undiversified holdings?

Some high-profile hedge fund managers don't know what to do

These struggles are not lost on some of the most high-profile members of the hedge fund community.

Tourbillon Capital, which manages $3.4 billion and is run by Jason Karp, published a soul-searching investor letter in August that outlined many of the struggles facing hedge funders today. A big part of his argument centered around the meteoric rise of passive investing, which he says makes active management far more difficult. His points echo a common criticism of passive trading — that it homogenizes the market and causes the type of crowding that makes it tough to beat benchmarks.

Karp has also railed against what he sees as "frothy speculation" leading to the huge influx of capital into positions such as going long tech. And it doesn't yet appear as if he's figured it out. His firm's flagship Global Master fund is down 10.6% in 2017, according to a recent note seen by Business Insider.

Meanwhile, Greenlight Capital founder David Einhorn has adopted a contrarian view on many of the most popular tech stocks, with limited success so far. He sees Amazon, Tesla and Netflix in particular as stretched, calling them "bubble shorts," and has openly wondered if the market has started using an "alternative paradigm" for calculating equity value.

Einhorn's funds have gained just 3.3% on a year-to-date basis, but actually beat the S&P 500 by almost three percentage points in the third quarter, suggesting that perhaps not all hope is gone.

What can hedge funds do?

Of course, it's always possible that tech stocks will experience a reckoning of sorts — a type of market event that slashes valuations in the sector and sends traders scrambling. It's something that Bank of America Merrill Lynch has warned against for months, citing overstretched sentiment and trader euphoria.

If that were to happen, it would give hedge fund managers a fresh chance to prove their bonafides with the investment herd dispersed.

The question is: How many of them can hang on for that long?

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One way hedge funds make money is by betting against stocks that they see running into trouble. 

To get a sense of some likely targets of those funds, Goldman Sachs puts together a quarterly Very Important Short Position list of S&P 500 stocks that are being heavily bet against, based on the dollar value of overall outstanding short interest on those stocks.

Here are the 17 stocks Goldman identified with at least $2 billion in short interest:

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17. Public Storage

Ticker: PSA

Subsector: Specialized REITs

Year-to-date total return: -2%

Value of short interest: $2.0 billion

16. General Electric

Ticker: GE

Subsector: Industrial Conglomerates

Year-to-date total return: -42%

Value of short interest: $2.0 billion

15. Costco

Ticker: COST

Subsector: Hypermarkets & Super Centers

Year-to-date total return: 12%

Value of short interest: $2.3 billion

• Ilana Weinstein is the founder of The IDW Group, which focuses on recruiting investment talent for all kinds of investment strategies.
• We asked Weinstein about the biggest trends in the hedge-fund business and how to get a senior-level job today.
• She says there are four major misconceptions people have about the industry.

llana Weinstein, founder of the The IDW Group, is a tour-de-force within the hedge fund industry.

She recruits top-level talent for the world’s most prestigious investment firms including hedge funds, family offices, and private equity funds.

Weinstein recently sat down with Business Insider’s hedge fund reporter Rachael Levy for a wide-ranging interview about the industry. She says there are four major misconceptions people have about the hedge fund industry. Here’s more from the interview:

Levy: What is the most misunderstood aspect of the hedge-fund industry by hedge-fund investors?

Weinstein: Four things:

• How lean these investment teams are. You can be a $10 billion-plus fund and have a team of five to 10 people if it’s a single-strategy fund. That means it is critical that everyone contribute in a meaningful way, but that is often not the case.
• The strength of investment teams is lumpy. You may say, "so what?" but when the team is lean it matters. This is obfuscated when fund performance is good because everyone is happy and doing well and there is less individual accounting going on. Over the last few years returns were more challenging and it became clear who the stars are. If they leave it’s a problem.
• Right now many talented people are unhappy and in-play LPs should know the hedge-fund industry is like a giant Jenga puzzle. All you need is a few key people to leave, returns drop, and the whole thing comes crashing down. If I’m an LP, I want to know who is key on the team and likelihood of them leaving. I don’t think anyone has this bird’s-eye view but us.
• "Turnover" is not a bad word. Founders are often afraid of letting people go because of the perception of turnover by LPs. LPs should encourage founders to prune their team. This also makes room for talented people to grow and not be as vulnerable to our call. The key is for LPs to diligence who drove the turnover (founder or the person who left) and what the reputation is of the person leaving. The story that gets spun after the fact is often not the reality.

You can read the full interview with Ilana Weinstein here. 

SEE ALSO: We asked a top hedge-fund recruiter what it takes to get a senior-level job these days

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Tech stocks have been on fire this year, and institutional investors have taken note.

According to data from Citi’s equity research group, tech stocks made up eight of the top 10 stocks held by the 50 largest hedge funds in the third quarter of 2017, with financials and healthcare close behind.

Despite the astronomic gains of stocks like Alphabet and Facebook, the aggregated Equity Hedge Fund Index has underperformed the the S&P 500 by 8.6 percentage points so far this year, Citi says. Hedge fund managers have also shifted away from less exciting sectors, like industrial stocks.

"Compared with last quarter, hedge fund top-10 holdings shifted away from Industrial and Utility names toward Information Technology, Consumer Discretionary and Materials stocks" writes Citi analyst Tobias Levkovich. "Additionally, hedge funds favored positions in ETFs and Energy in the third quarter while there was a decline in Financials, Telecommunication Services and Consumer Staples holdings."

Here’s the full list: 

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10. DowDuPont

Ticker: DWDP

Hedge fund holdings: 7

Sector: Materials

Market value (as of 3Q 2017): $161.96 billion

Year-to-date price change: +5.95%

9. Bank of America

Ticker: BAC

Hedge fund holdings: 7

Sector: Financials

Market value (as of 3Q 2017): $264.99 billion

Year-to-date price change: +18.42%

8. Apple

Ticker: AAPL

Hedge fund holdings: 7

Sector: Information Technology

Market value (as of 3Q 2017): $790.05 billion

Year-to-date price change: +46.18%

• Ilana Weinstein is the founder of The IDW Group, which focuses on recruiting investment talent for all kinds of investment strategies.
• We asked Weinstein about the biggest trends in the hedge-fund business and how to get a senior-level job today.
• She says senior-level employees' attitudes about changing jobs still surprise her, even after 15 years in the industry.

llana Weinstein, founder of the The IDW Group, is a tour de force within the hedge-fund industry.

She recruits top-level talent for the world’s most prestigious investment firms, including hedge fund managers, family offices and private equity funds.

Weinstein recently sat down with Business Insider’s hedge fund reporter, Rachael Levy, for a wide-ranging interview about the industry. She says there are still things that surprise her, even after 15 years of recruiting for every aspect of the industry. 

Weinstein says people are scared of change, even when it could greatly benefit them. Here’s more from the interview:

Levy: What has most surprised you in 15 years of interviewing the best people in this business?

Weinstein: How hard it can be to get them to make a move! Even now where they are the most receptive because of this disconnect between their performance and that of their fund, I still see the economic loss-aversion theory at play. These are people who are the most talented at taking risk for a living and yet when it comes to assessing their own career they have an inherent bias to weight the risks of a new opportunity over what they are likely to gain.

It’s amazing how lopsided their thinking can be, but luckily they are also highly rational, so once they wrap their head around what they are doing they can make the leap.

You can read the full interview with Ilana Weinstein here. 

SEE ALSO: We asked a top hedge-fund recruiter what it takes to get a senior-level job these days

Join the conversation about this story »

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