Howard Marks, cofounder of Oaktree Capital Management, just splashed some cold water on the hedge fund industry.

The alternative-investment giant, which manages $98 billion, reported earnings on Thursday.

During the call, Goldman Sachs analyst Alex Blostein asked about how Oaktree's limited partners are allocating their money to hedge funds relative to other alternative investment firms.

Marks' reply put a whole bunch of hedge fund managers in their place.

He said (emphasis ours):

"There was never anything about the term 'hedge fund' that produces instant magic. A hedge fund is just a form of delivery, and maybe a form of compensation. But all investment accomplishments still go back to superior judgments.

"You may not know, Alex, that I wrote a memo on hedge funds in 2004, and what I said then was when I first learned about hedge funds, which is probably in the '70s, there are 10 hedge funds ran by 10 geniuses. And in 2004, I said today there are 5,000 hedge funds, and I don't think they're run by 5,000 geniuses. Today we're probably up to 10,000.

"The performance of the greatest hedge funds run by geniuses, and their closing, created a big umbrella over this industry, which permitted the other 9,990 hedge fund managers to start hedge funds and command hedge fund fees."

In other words, the hedge fund industry was launched by a handful of genius investors (Marks could be referring to people like Jim Simons), and the rest of the industry has followed in their path, despite not being as smart or as profitable as their forebears.

In a 2004 client note dubbed "Hedge funds: a case for caution," Marks asked investors to give up on their "irrational dreams" and provided colorful analogies on the scability of hedge funds.

"I do not expect a debacle, just a disappointing experience. The sad fact is that, on average, hedge funds may go down as just another former silver bullet," he wrote.

The industry has been having a particularly hard time of it this year, with poor performance and insider trading investigations. Overall, the industry's return was at 1.6% through June, according to Hedge Fund Research. That's less than half the gains in the S&P 500.

Here's Marks again (emphasis ours):

"But I dare say that the average hedge fund performance since I wrote that memo has not warranted the average hedge fund compensation. I think it is fair to say that. By the way, I said in that memo that the average hedge fund would make about 5% or 6% in coming years, and eventually people would give up on paying 2 and 20 to get 5% and 6%. And the report on that 10th anniversary memo said the average return has been 5.2%, but at that time assets were still screening upwards, and now people have caught up in reality, I think.

"And so at the margin, the appetite for hedge funds has been correcting. That has no impact on us. And in fact, you can't do it in stocks and bonds and you think less in hedge funds, I think that bodes well for the kind of things that we and our peers do."

Oaktree's competitors have also been vocal on hedge funds. Blackstone's COO, Tony James, for example, had provided a perfect summary of why the industry has been struggling, while billionaire Steve Schwarzman showed little sympathy for them.

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A top-performing $8.5 billion hedge fund has sounded the alarm.

The markets are in a "historic" situation, according to Carlson Capital, an $8.5 billion Dallas-based hedge fund.

The hedge fund highlighted numerous concerns in a recent investor letter viewed by Business Insider.

These include:

• "US treasuries are the wrong price."
• Investors have "bypassed growth and moved to risk-parity, frankly a shameless abrogation of any equity-fundamental analysis replaced by the bond proxy."
• "The valuation of the stock market is being set by unreliable price indicators such as bonds."
• "We have witnessed mania around helicopter money, the recession, and the fatuous concept of negative rates."

The June letter was written by Richard Maraviglia and Matt Barkoff, who are portfolio managers on Carlson's Black Diamond Thematic fund.

The fund, which makes long and short stock bets, is beating competitors. The fund was up 9.9% net of fees in the second quarter, bringing year-to-date returns through June to 10.97%, according to the letter.

Other stock-focused hedge funds fell 0.09% on average through June, according to the Hedge Fund Intelligence US equity index. Carlson managed $8.5 billion firmwide at the start of the year, according to HFI's Billion Dollar Club ranking.

The firm, through a spokesman, declined to comment.

Here are some of the major takeaways from the letter (emphasis ours).

"US treasuries are the wrong price"

Over the last two quarters, we have hinted that we have seen poor risk reward in bonds. Now, we are saying it outright: US treasuries are the wrong price. Generally, being the cynics that we are, we have always had a problem with something or some type of bubble. Since 2013, when the momentum phase of the stock market kicked in, excess liquidity has found its way into a series of similar but ultimately end-game bubbles. If 2013 and 2014 was characterized by an insatiable appetite for ultra-growth predicated almost exclusively on concept versus reality in industries such as clean power and biotechnology, and 2015 was about mega-cap domination crowding and quantdriven price momentum (FANG), then 2016 has been the year when investors just bypassed growth and moved to risk-parity, frankly a shameless abrogation of any equity-fundamental analysis replaced by the bond proxy. The new acronym is now TINA – “there is no alternative” and more potently, STUD – “Staples, telecom, utilities, and defense.” A bell is ringing.

...

The valuation of the stock market is being set by unreliable price indicators such as bonds.

A "literally historic" situation

The Fed has typically hiked and should hike when one-third of the United States have unemployment below the NAIRU, when the ECI rises this much, two years after a trough in employment, or when Unit Labor Costs have risen sharply or when overtime hours rise or when job openings reach twenty-year highs.

Alas, not this time. Instead, we have witnessed mania around helicopter money, the recession, and the fatuous concept of negative rates. As investors, we look for anomalies and the above discussion seems literally historic in proportion.

Additionally, the Bank for International Settlements (BIS), the world’s largest international financial organization owned by sixty of the world’s central banks, recently produced a report on demography and inflation. In its opening abstract, it notes in its conclusion that “in particular, a larger share of dependents (i.e. young and old) is correlated with higher inflation, while a larger share of working age cohorts is correlated with lower inflation”. Demography accounts for about one-third of the variation in inflation with the rest being other factors we have regularly discussed such as the Taylor Rule, the Phillips Curve, productivity, and other cost push factors such as oil. “Furthermore, our results suggest that ageing might eventually lead to higher, not lower, inflationary pressures – contradicting the prevailing view.” In other words, there is a positive correlation between the dependency ratio which could be young and old. In this case, it is old, but the birth rate has also increased, so it is both. Interestingly, even the central banks comprehend that the prevailing view has a flaw. Prevailing views generally do. With the sixty-five and older cohort growing by a staggering thirty-seven percent over the next ten years and by seventy-five percent over the next thirty years, BIS concludes:

“Given that in the future the share of the very old is expected to grow fast, the predictions should be treated cautiously. In contrast, estimates for past inflationary pressures rely more on the cohorts in the middle of the distribution, where our estimates are the most stable. Taking our estimates at face value, the demographic pressure on inflation would be expected to reverse almost fully over the coming decades, from benign to more challenging.”

More inflation to come

On the heels of massive monetary policy, Japan and Europe have introduced the idea of fiscal stimulus. As it relates to the US, after several years of austerity, the tide has turned. The Affordable Care Act has set the stage for a huge increase in fiscal spending for major healthcare programs (primarily Medicare) as well as Social Security.

Combining this with our assessment of the output gap and productivity about which we have written extensively and this current update on the US economy, we largely rest our case. The budget deficit has declined every year since its peak of nearly ten percent of GDP and the CBO expects it to begin an inexorable rise. Higher government spending is both inflationary and additive to GDP. Economic expansions do not die of old age like humans do. They come unstuck from excess investment imbalances or from aggressive tightening.

...

Higher inflation expectations or higher rates should cause a stronger dollar and a reversal in commodity stocks whose fundamentals remain tied to a disastrous China. Low volatility stocks have extreme tail risk. We have a barbell short across both styles and sectors.

Consider gold in light of Trump

We noted that gold offered two ways to win at the end of last year; as the 2000’s deflationary/fear hedge or the actual logical classical reason as a hedge: to inflation. Finally, the rise of anti-globalism and populism such as Brexit, Trump, and others supports the inflation cycle.

Expect a big Fed impact

In spite of all of this, the Federal Reserve is expected to never hike. As the world goes anti-global, Yellen seems to pay ever more attention to potential exogenous world risks. A China devaluation, a small stock market correction, the US election and Brexit have offered a series of excuses to hold back. Her repeated hesitations have led to a view that the Fed is “constitutionally dovish.” It will take three to six years to sort out a British exit from Europe, during which time its consequences will have been forgotten, remembered and forgotten again many times. It seems inappropriate for the Fed to wait until they know for sure especially in the context of sentiment that remains unscathed post-Brexit. Importantly, however, the constant delays mean the impact of a Fed Funds hike on financial conditions now will be much larger than before. The ultimate irony surely is to complain about hike-tightening conditions; is that not the point?

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Investors have begun pulling money from Pershing Square, the hedge fund helmed by billionaire investor Bill Ackman.

According to numbers released by Pershing, its public fund's net asset value went up from June to July. However, the fund's total assets under management went down.

You can contrast the two months here. With a little math, you can see that redemptions totaled about $430 million in the second quarter.

June:

July:

Earlier this month Ackman addressed a Fortune story about his redemptions, saying that they were relatively low. He said they were 37% lower than the average of the last eight years.

"My guess is that our redemption that we've received as percentage of capital are probably among the lowest in the industry, and that's really because we benefit from a very stable capital base, and that's because our investors have been incredibly supportive of us and we appreciate that support had enabled us to, I think, to be very effective and to take a long-term view," Ackman said on his second-quarter call to investors.

Pershing Square had the worst year in its history in 2015, down 20% against the S&P 500. This was mostly because of the firm's long position in Valeant Pharmaceuticals, a stock that has lost 90% of its value since last October. Ackman's very public short crusade against Herbalife didn't help matters either.

Pershing Square would not comment on this story.

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The stock market bull run is crushing hedge funds that can’t figure out why stocks keep rising, despite indicators that they should be falling.

Caerus Investors, a small New York-based equity hedge fund, just released its second quarter letter, which provides some insights into what's going on.

Business Insider viewed a copy, and here are some of the more interesting points:

• "Never can we remember a stretch in the market with as many people fighting the bull. The wall of worry is as treacherous as we have seen."
• "At every troubled juncture, the market has confounded its participants, successfully shrugged off bad news and galloped triumphantly to a new high. This bull is learning, adjusting and becoming harder to predict."
• "The greatest bullfighter of all time, Manolete, was gored to death by a Miura bull, an event that left Spain in a state of shock in 1947. Many contemporary hedge fund managers can probably relate."

The firm’s Caerus Select Strategy, which focuses on consumer stocks, returned 8.8% annualized since it launched in July 2011. The strategy is roughly flat for the year, rising 0.63% through July 29, according to the letter. The firm managed $181 million, including trading allocations from separate accounts, as of June 1. 

Here are some excerpts from the letter (emphasis ours).

Fear the bull market

"Never can we remember a stretch in the market with as many people fighting the bull. The wall of worry is as treacherous as we have seen.

The rise of Donald Trump and global political populism, turmoil at the major party conventions in the United States, escalation of radical Islamic terrorism, the coup attempt in Turkey and related fallout, China’s debt crisis, yuan weakness and related economic slowdown, the EU’s troubled bank sector, negative interest rates throughout much of the developed world, the renewed bear market in oil, and, last but not least, Brexit, could individually or collectively upend the global economy and yet equities markets continue to rise.

All of these concerns have justifiably kept most participants conservatively positioned. Yet, at every troubled juncture, the market has confounded its participants, successfully shrugged off bad news and galloped triumphantly to a new high. This bull is learning, adjusting and becoming harder to predict.

...

The greatest bullfighter of all time, Manolete, was gored to death by a Miura bull, an event that left Spain in a state of shock in 1947. Many contemporary hedge fund managers can probably relate.

While we at Caerus have largely stayed away from this fight, we admit to being somewhat confounded by the run in many consumer stocks. Fundamentals within the broader consumer discretionary universe remain somewhat muted, as evidenced by many second quarter earnings reports. Lodging Revenue per Available Room ("RevPar"), apparel spending and meals away from home continue to exhibit weak trends. More recently, Ford threw cold water on the recent rally in the auto sector with dismal second half guidance."

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Schonfeld Strategic Advisors, a multibillion-dollar family-office hedge fund, is expanding its reach in quant trading.

The New York-based firm is backing a new quant fund from Eric Tavel, who previously worked at Goldman Sachs Asset Management and the Canadian bank RBC.

Schonfeld is seeding its new quant investment with $100 million. The new firm, Masa Capital, plans to launch in the first half of next year with as much as $150 million under management, including Tavel's own cash.

Tavel headed RBC's quant proprietary trading group, GAT, from 2010 through last year, according to a LinkedIn page. He oversaw Goldman's quantitative investment strategies group and comanaged the Global Alpha Fund from 1996 through 2010, according to a Schonfeld press statement.

The new fund will focus on quant trading in futures and currencies, among other strategies, Tavel told Business Insider.

While Schonfeld already runs quant strategies in its book, chief investment officer Ryan Tolkin said the new addition would help the firm diversify.

"Many of our strategies are statistical arbitrage strategies," Tolkin said. "That basically means relying or using historical pricing information to help predict future price movement of stocks. Many of them are equity based, and what Eric is doing differently is trading different asset classes from a quantitative perspective."

Schonfeld managed about $4 billion at the start of the year excluding leverage, according to a regulatory filing. That means Masa will make up a tiny bit of the firm's overall portfolio when it launches, but the move to back Masa coincides with Schonfeld's backing and acquisition of more talent, Tolkin said.

The launch comes as more asset managers push into quant investing.

Steve Cohen, for instance, is investing $250 million in a Boston-based quant firm, Quantopian, which makes trades based on algorithms sent by thousands of traders. Cohen's family office, Point72 Asset Management, which manages his billions, already has a separate quant arm called Cubist Systematic Strategies.

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A new hedge fund that has the backing of legendary investor Stan Druckenmiller has made a big hire.

Castle Hook Partners hired Sean Rhatigan as its chief financial officer, and he started this week, according to two people familiar with the matter.

Rhatigan worked at Och-Ziff Capital for 16 years and left in December as its executive managing director responsible for accounting and operations, according to a LinkedIn profile.

Och-Ziff is one of the hedge fund industry's major players and manages about $39 billion, according to its website.

David Rogers and Josh Donfeld, who left George Soros' family office earlier this year, are launching Castle Hook, based in New York. Druckenmiller is planning to back the launch in his second-biggest investment in a hedge fund.

His biggest investment was in Zach Schreiber's PointState Capital, with $1 billion. Druckenmiller, through a spokesman, has previously declined to say how much he would be backing Castle Hook.

The firm plans to launch in the fourth quarter of this year or first quarter of 2017, Business Insider previously reported. It's one of several highly anticipated launches on the horizon competing in a difficult fund-raising environment.

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The world's biggest hedge fund thinks that the next radical change in central-bank policy is almost upon us.

Bridgewater Associates sent a note to clients on Wednesday written by Greg Jensen, Jason Rotenberg, and Jeff Amato. Jensen is Bridgewater's co-CIO and former co-CEO.

The note said that central-bank policies up until now — such as dropping interest rates and quantitative easing — haven't boosted economies enough. Policy makers need to try something radical: putting money directly into consumers' hands.

Here's the key passage from the note, which was obtained by Business Insider (emphasis added):

"The world is not transpiring as most central bankers had expected. They have had to consistently adjust their thinking about what interest rates and monetary policies are appropriate, and they have had to be more accommodative than they had expected and buy more 'risky' assets. We believe that at this stage either fiscal stimulation that is monetized or putting money directly into the hands of spenders (i.e., MP3) is the logical next move."

The note cites central-bank policy in Japan as an example of monetized fiscal stimulation. Here is the passage:

"Japanese policy makers, while being technically careful to not break the rules of independence between the [Bank of Japan] and the [Ministry of Finance], have moved forward in a practical way to create de-facto MP3 with fiscal stimulus indirectly financed by the BoJ and increased purchases of riskier assets. These moves should help on the margin in getting money into the hands of entities that will impact the real economy, but markets have been underwhelmed by the details."

Westport, Connecticut-based Bridgewater manages about $150 billion, excluding leverage.

The Wall Street Journal earlier this year wrote about tensions between Jensen, one of the authors of the note, and billionaire founder Ray Dalio. Dalio later told Business Insider that he believed that Bridgewater's culture is misunderstood.

Rotenberg is a Bridgewater analyst, according to a Bloomberg Terminal profile. Amato's position was not immediately clear. A representative for Bridgewater at external PR firm Prosek Partners declined to comment.

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The Trump Taj Mahal will close after Labor Day as owner Carl Icahn exits Atlantic City, according to the Associated Press.

This is the end of a long fight for Icahn, who purchased the Taj Mahal out of bankruptcy back in March. Donald Trump opened the casino 26 years ago but took it into bankruptcy, mostly leaving Atlantic City in 2009. Trump then retained a small stake in the casino in exchange for the use of his name.

Icahn says that he spent $100 million trying to revive the Trump Taj Mahal, but was he was stymied, in part, by the longest strike in Atlantic City history, which started on July 1.  

"It was a bad bet," Icahn told the Associated Press. "How much good money do you throw after bad?"

Casino workers wanted was a restoration of pension benefits and health insurance that were promised to them during bankruptcy proceedings before Icahn took over. Icahn offered them fewer benefits, and workers found that unacceptable. Now 8,000 jobs will be lost.

"What is my obligation? I give hundreds of millions to charity, but this is a business; it's not a charity. They look at this as my responsibility, and I'm a bad guy if I don't give them what they want," Icahn said.

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Carl Icahn is having a bad day.

First he announced that he would be leaving Atlantic City after spending $100 million since March to revitalize the Trump Taj Mahal.

Then his firm, Icahn Enterprises, reported a second-quarter net loss of $69 million on revenue of $4.4 billion.

From the beginning of the year to June 30, the company brought in $7.5 billion in revenue and a net loss of $906 million. At the same time last year, IEP brought in $9.5 billion in revenue and $373 million in income.

We should note, though, that this year IEP took a $334 million noncash charge for overstating the value of goodwill in its energy segment.

And it's Icahn's bet on energy that has given him the most grief over the last year or so. In September, energy was the third-largest segment in Icahn's portfolio, ultimately including bets on Cheniere, Freeport-McMoRan, and Chesapeake Energy.

In May, Standard & Poor's cut the investment firm controlled by Icahn to junk status.

Icahn will host a call for investors at 10 a.m. Eastern to discuss these results.

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Carl Icahn still believes the market is going to crash.

Icahn Enterprises, the holding company helmed by Icahn, reported a second-quarter loss on Thursday morning, and a lot of that can be attributed to the company's investment segment.

You see, it bet big on a deep conviction about the market that Icahn shared with the public last year, and it hasn't played out the way Icahn thought (at least, not yet).

The long positions in Icahn's $1.7 billion fund were mostly flat in Q2, but his short positions dragged the fund down to a loss of 6% for the quarter.

On the investor call, Icahn execs explained this was due, in large part, to Icahn's continued conviction that the high-yield bond market is going to crumble. In May, Barron's reported that IEP had a net short position of 149%.

"I think the composition hasn't dramatically changed. We still have our bearish views on high-yield spreads, and frankly, they're even stronger now with spreads compressing so much the market seems to be pushing spreads tighter and tighter," said Keith Cozza, CEO of Icahn Enterprises.

"Expressing it in the form of CDX is still part of our hedging strategy, and the rest of it there is a combination of some single names, but the majority of our hedging is done through broad market hedges, such as S&P 500, things of that nature."

Danger

Icahn also released a video in September, called "Danger Ahead," outlining his fears about the stock market. He believes that keeping interest rates at or near 0% has created a massive bubble in the market.

In fact, he believes it's just a symptom of what's wrong with our entire economy. The answer, he told Business Insider in an interview at the time, really boils down to making corporations pay their fair share.

"We legislate inequality ... protect the status with these corporations," he said. "CEOs should not be able to make 800 times what the worker makes."

In the video, Icahn endorsed Donald Trump because he thinks Trump is the only candidate tough enough to take on special interests head-on. Now that those groups — and super PACs — control electoral purse strings, candidates on both sides of the aisle have become more polarized to keep up.

"I disagree with [Trump] on certain issues and would probably need to talk to him more," Icahn said in his video, later adding, "Teddy Roosevelt was great. He stood up to JPMorgan. Where do we get a guy like that?"

Really good question, Carl.

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Part of measuring on Wall Street is finding exactly the right stick.

There are many options — returns, assets under management, what have you. Another is net asset value, and that's what we're going to talk about today.

By that metric, Bill Ackman, who has had a notoriously bad year thanks to his short bet on Herbalife and his long slog with Valeant Pharmaceuticals, actually has a leg up on his longtime nemesis.

On Thursday morning, Icahn Enterprises, the conglomerate founded by billionaire Carl Icahn, posted a loss. Most of it was derived from a truly dismal year for the $1.7 billion fund Icahn Investments, which is down 18% for the first six months of the year after going short on the market up to its eyeballs.

The Sunday before, billionaire Bill Ackman, of the hedge fund Pershing Square, also reported dismal returns for the quarter. Pershing is also down 18% for the first six months of the year.

Go figure. The matching losses are a funny coincidence since the two investors are frenemies at best and archenemies at worst. Icahn infamously took the other side of Ackman's very public three-year short of Herbalife, a nutritional supplement company. Icahn owns 18.3% of the company's shares.

Since these two men have such similar terrible returns by one metric, it's worth looking at NAV to better understand who is winning 2016. NAV is calculated by deducting a fund's liabilities from the combined value of all its shares, then dividing that by the number of issued shares.

Basically, if your book were sliced into pieces, this is what it would be worth.

Ackman ended the first quarter with an NAV of $17.81, and by June 30 it was sitting at $16.54 — about a 7% drop. You can see the weekly change in Pershing's public fund here.

Meanwhile, Icahn ended the first quarter with an NAV of $37.98, and by June 30 it had fallen to $29.90 — a much worse 21% decline.

Given Icahn's more precipitous drop, by this metric (this one metric) Ackman is beating Icahn. The biggest killer of NAV for Icahn's portfolio was CVR Energy, which is down over 65% year to date.

From Icahn's Q2 presentation:

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London-based hedge fund 36 South Capital Advisors makes buckets of money when markets go haywire.

Jerry Haworth, the firm's CEO, is ready, and waiting expectantly.

He spoke to Raoul Pal from Real Vision TV in an interview aired Friday, and said that central banks have been trying to dampen volatility by pumping money into the economy, but that in the end this will backfire.

"There's going to be chaos," he said.

Here's the relevant bit from the interview (emphasis ours):

"The credit bubble has got so big that the participants can't service their interests, and the government is one of the biggest participants, so they dragged the interest rate down to zero, and then they got trapped there. Even a homeless person can service a $1 billion loan at zero, so one wonders how it is going to end.

"It creates second order consequences where people say, 'well, it's free money,' and that I think is eventually going to create the inflation. Now that you have the inflation, now you've got the dilemma: What do you do with interest rates? If interest rates follow suit, there's going to be chaos. Equity markets, property markets, bond markets. Can you imagine the property market in London at [an interest rate of] 7%? Probably the price will drop 50% to 75%."

Haworth has reason to say this. His fund primarily invests in long-dated options and is basically long volatility. That means that his fund benefits when volatility spikes and markets start moving wildly. He said that central banks right now are trying to reduce volatility, but that that would lead to a big spike in the future.

He said:

"I see volatility like a train moving out of the station. You get the first jolt, then nothing, and then slowly it starts to pick up. And then normally ... it's contagious. It builds up. But now like in August and January, you feel the jolt, then you see central bank action and it dies down again ... Short term, it's having the desired effect. Medium and long term, I'm not sure it's not going to result in much more negative consequences and extreme volatility."

One of 36 South's funds gained more than 200% in the market downturn after the 2008 Lehman Brothers collapse and raked it in last August in the China markets chaos, Business Insider reported.

The firm managed about $913 million at year-end 2015, according to a regulatory filing.

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Hedge funds are not doing too hot in 2016.

Performance metrics took a hit through the first six months of the year.

Hedge fund tracker Eurekahedge found the industry netted a $5.2 billion performance loss through the first six months of the year.

That has led to some tough consequences, including redemptions and calls for the industry's demise.

If you want one chart that sums up the reasons for the decline, Driehaus Capital Management has you covered.

In a tweet Sunday, Driehaus showed the performance of Goldman Sachs Hedge Fund VIP long index versus Goldman's Hedge Fund VIP short index. Essentially, the long index tracks the companies that hedge funds are most heavily invested in to go up, and the short index tracks the companies hedge funds are betting against.

The performance so far is not pretty. The long index is basically flat for the year, while the short index is up roughly 10%, according to the chart. By comparison, the S&P 500 has returned 8.19% year-to-date. According to Eurekahedge, long/short equity hedge funds (those that focus on stocks) were down 0.96% in the first half of 2016.

To be fair, this is aggregate data, and some managers have probably outperformed over the time frame. Additionally, Driehaus is a manager of liquid alternatives, which are seen as direct alternatives to traditional hedge funds, so it's not coming from an impartial observer.

Numbers are numbers, however, and it looks like so far the companies hedge funds thought were winners are losing, and the firms they thought were losers are winning.

Ouch.

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Netflix has a problem: It's you.

That's according to Crispin Odey, one of London's biggest hedge fund managers.

Voracious consumers are watching Netflix's content more quickly than the online streaming service can replenish it, Odey said during his hedge fund's second-quarter phone call, a 53-minute recording of which was obtained by Business Insider.

Odey's observation is interesting since Netflix already produces a lot. This year alone, the company plans to release 600 hours of content, which would take 25 days to binge-watch straight through.

Odey's $9.3 billion hedge fund held a short position in Netflix as of the July phone call, meaning that the firm would earn money if the stock price drops. 

Here are Odey's key points from his firm's call:

• Investors need to see the potential for yield in Netflix.
• Odey thinks that Netflix needs $17.5 billion of sales by 2020 and $8.7 billion of sales by this year.
• Revenues in the past four quarters total $7 billion.

Here's the key quote (emphasis added):

"It's a great business but the fact is you watch their programs faster than they can make them...Their need to buy in basically new content...is so much faster than their subscriber growth.So in fact we would say, this is absolutely impossible for them to achieve. And what you can see is their cash flows, which are on a quarterly basis are negative, and remain negative, so we think actually it's a good short."

Netflix missed its earnings big time last month, as Business Insider previously reported. Its stock price plummeted the day the company announced its disappointing second-quarter results on July 18, though the shares have since regained most of the losses.

Odey wasn't the only fund manager set to gain on Netflix's bad news. Other short sellers made nearly half a billion just in trading in the after-hours of Netflix's stock drop. It's not clear how much Odey made off of Netflix's drop and whether the firm still holds its short position.

He gained the spotlight earlier this summer after making money off of the Brexit, but his firm has since nursed deep losses.

One of Odey's funds, the $476 million Swan fund, has dropped -24.7% this year through the end of June, according to an investor update viewed by Business Insider. Odey's European fund dropped -30% through July 14, according to Financial News.

A phone call and an email to Odey's media contact, Lucy Brantly, were not immediately returned.

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And now some bad news for billionaire Bill Ackman, the founder of the hedge fund Pershing Square.

Valeant Pharmaceuticals, the drug company whose 90% stock-drop disaster has been pulling down Ackman's portfolio since October, announced on Monday that three executives would leave.

The departing executives were of no small importance at Valeant. Pavel Mirovsky was the head of the company's Europe business, Laurie Little was the head of media relations, and finally Robert Chai-Onn was the company's general counsel.

It's also not very common for a company to announce the exit of such integral players the day before a quarterly earnings report.

But a standard earnings report is not all that has been happening in the land of Valeant and Ackman. And the removal of Chai-Onn and Little is a good time to review the allegations leveled in a lawsuit that everyone seems to have forgotten about.

You may recall that investors in the Botox maker Allergan are suing Valeant and Ackman over their 2014 attempt to buy Allergan in a hostile takeover. On Friday a California judge denied Ackman and Valeant's motion to dismiss the investors' claims (again).

In short: This isn't over.

Pershing Square declined to comment on this story. Representatives for Valeant have yet to respond to a request for comment.

Words mean things

Valeant and Ackman's attempt to purchase Allergan was somewhat novel.

Instead of buying the company outright, Valeant teamed up with Ackman, who purchased a large chunk of Allergan shares.

Ackman's stake was disclosed alongside Valeant's hostile takeover offer, and — surprise! — the billionaire said he would vote his newly acquired Allergan shares in support of the sale to Valeant.

Ackman then pulled out the activist investor's playbook to pressure Allergan to accept an offer from Valeant, writing nasty letters describing Allergan's "incredibly inappropriate" behavior as it sought to fend off the takeover by a company that was known for slashing research-and-development spending and jacking up drug prices.

That didn't work. Allergan was eventually rescued by a white knight and Ackman — still an Allergan shareholder — made a bundle (about $2.6 billion by one count). Valeant profited a great deal too, because as part of its deal with Ackman it would get a portion of his profits.

Is this even legal? You wouldn't be alone in asking that, though both Valeant and Ackman have said they are sure that it was.

Shareholders in Allergan including the State Teachers Retirement System of Ohio sued Ackman and Valeant on the basis of SEC Rule 14 e-3. It says basically that if company A is planning to take over company B, anyone with knowledge of that takeover can't trade in company B once company A has started to make moves to bid for the company.

Ackman and Valeant say they never really intended to make an offer. What they were doing was ... something different. At least, that's what it was after some language was changed around by Chai-Onn, who was general counsel at the time.

From the complaint:

"A February 23, 2014 draft of the Relationship Agreement circulated among Ackman and Valeant general counsel Robert Chai-Onn likewise states that if 'a Company Transaction is being pursued by [Valeant] through a tender offer ... each of the Company, [Pershing] and the Co-Bidder Entity will be identified as co-bidders.'"

Then Chai-Onn changed that language, according to the complaint:

"A February 24, 2015 draft of the Relationship Agreement noted that the 'consent of both [Pershing] and the [Valeant] shall be required for either party to launch a tender offer or an exchange offer' and if the 'Transaction is being pursued by [Valeant] through a tender offer … each of [Valeant], [Pershing] and the Co-Bidder Entity will be identified as co-bidders or soliciting persons, respectively.'

"Thus, drafts of the very document establishing the mechanism through which Ackman would acquire Allergan shares, on their face, evidence that Valeant was contemplating a hostile tender offer all along. In fact, it was only very late in the drafting process, on February 24, that Defendants inserted a self-serving and misleading disclaimer into the Relationship Agreement stating that the parties 'acknowledge that no steps have been taken towards a tender or exchange offer for securities of Allergan.'"

Ackman echoed that same language when he was deposed in the case, saying: "This litigation is a complete waste of time, OK? I'm happy to stay here for five hours, OK. I'm going to do it — I know it's your job; um, but if I can deliver a message to the board, OK, it's a complete waste of time. We did not stake one step, not one step for doing a tender offer, nor did Valeant, OK? Not one."

I award you no points

Basically the litigants are arguing that simply saying that "no steps have been taken" doesn't make it true. Actions, in this event, are supposed to speak louder than words written in legalese. More from the complaint:

"As reflected in a February 16, 2014 email among Valeant General Counsel Robert Chai-Onn and Valeant's counsel, Defendants' attempt to affix the 'co-bidder' label to their relationship appears to have been motivated by their lawyers' concern that regulators might be "offended by a party other than a bidder benefitting from a toehold."

Little is mentioned just once in the complaint, when the defendants point out that press materials about the attempted takeover were prepared in advance of Valeant and Ackman's announcement that they were doing the deal in April of 2014.

From the complaint:

"Specifically, a draft 'Q&A' emailed by Valeant's public relations consultant to Valeant's head of Investor Relations, Laurie Little, on April 17, 2014, asked: Question: Are you willing to launch a tender offer to get this deal done? Answer: We would prefer to negotiate with [Allergan] on a friendly basis. However, we are firmly committed to completing this transaction."

This is part of why California Judge David Carter agreed with the plaintiffs and denied Ackman and Valeant's motion to dismiss this complaint. He called some of the defendants' arguments "unpersuasive."

"Defendants point to the decision in In re JDS Uniphase Corp. Sec. Litig., No. C 02-1486 CW, 2003 WL 26615705 (C.D. Cal. Nov. 3, 2003), which provides no meaningful analysis on this issue," he wrote. "Defendants have pointed to no other convincing authority that addresses this issue."

Brutal.

On the same day the court also addressed Ackman and Valeant's motion to compel the plaintiffs to comply with a subpoena and give further interrogatories. That motion was denied.

Double brutal.

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You've probably heard that hedge funds are having a tough time of it.

There has been poor performance and insider-trading investigations. Overall, the industry's return this year was at 1.6% through June, according to Hedge Fund Research. That's less than half the gains in the S&P 500.

A common complaint among hedge fund managers is that market conditions are making it much harder for them to eke out a return.

On one hand, you could say, well, that's what you get paid 2% and 20% for. On the other hand, it turns out, they may have a point.

Barclays just published a survey of investor firms with $7.7 trillion in assets and $900 billion invested in hedge funds, and 57% of respondents said hedge funds had underperformed of late because of "macro conditions."

Which macro conditions, you ask? The chart below from Barclays shows how correlation and dispersion affect hedge fund returns. Correlation is the degree to which different stocks in the S&P 500 move in the same direction, and dispersion is the difference in stock movements regardless of whether they are moving in the same direction.

The chart on the left shows the amount of performance hedge funds were able to generate in different market conditions from 2000 to 2015. They generated 9.9% of alpha, or outperformance, when dispersion was high and correlation was low — and very little when the reverse was true.

The chart on the right shows that right now we're in the latter kind of environment. Correlation is high, and dispersion is low. In other words, it is hard for hedge funds to make money.

Maybe those whining hedge fund managers are on to something. 

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The hedge fund industry has a problem. There are too many hedge funds. 

That's according to a Barclays survey of 340 investors managing $8 trillion in total, released this week.

The UK bank asked survey participants why hedge funds have underperformed expectations. The most popular answer was that the industry has now gotten too big relative to the number of opportunities. 

The industry has as many as 11,000 funds worldwide now, managing about $3 trillion in assets.

It's been phenomenal growth from the early days when the business was a cottage industry. At that time, it was possible to start a fund with little more than some starting capital from family and friends, and, as the cliché goes, two guys and a Bloomberg terminal in a basement.

The increased size of the industry has created two problems. First, too many people have tried to enter the market.

Billionaire investor Steve Cohen has said he has had trouble finding talent for his family office Point72 Asset Management, while Howard Marks, cofounder of private equity firm Oaktree Capital Management, splashed cold water on the industry last month. 

"The performance of the greatest hedge funds run by geniuses, and their closing, created a big umbrella over this industry, which permitted the other 9,990 hedge fund managers to start hedge funds and command hedge fund fees," Marks said during an earnings call.

In other words, many not-too-talented people raced into the industry. They might be drowning out the true talent.

Second, there is increased crowding. Here's what Barclays had to say about the issue:

"While there are many advantages that larger [hedge funds] have (e.g., access to talent, institutional infrastructure, etc.), there are also several drawbacks. One such drawback is that as [hedge funds] become larger, their investable universe can often be diminished (e.g., due to position limits) as it is often not 'worth it' to invest in smaller situations that can hardly move the PnL needle."

Crowding hasn't always been a problem. In fact, piling in to popular names has traditionally been a winning bet. However, since the tailend of 2015, indices populated by crowded names have been dropping sharply, impacting a big chunk of the hedge fund industry. 

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Hedge fund doomsayers have long warned about big investors yanking cash, shrinking the high-fee industry.

To that, hedge funds might as well respond: "Haters gonna hate."

It seems like even when investors are pulling out, they're putting that money right back into other hedge funds.

That's according to a Barclays survey released this week of 340 hedge fund investors managing $8 trillion.

Nearly half of the investors polled said that they are redeeming from their hedge funds and are reallocating that money to other funds, the survey said. And nearly a third are doing nothing with their hedge fund allocations at all.

Why are investors staying loyal to hedge funds? Here's Barclays:

"One of the most important reasons is that it is difficult to find an alternative with similar risk / return characteristics. And when the risk-adjusted returns are combined with the low correlation they tend to have, the impact on investors' portfolios tend to be positive. Indeed, according to our analysis ... a majority (55%) of HFs, even in a year like 2015 where HFs did not perform particularly well, would have been additive and improved the efficient frontier of the 60 / 40 portfolio. Thus while performance may have seemed poor on a stand-alone basis, there appears to be a role for HFs in investors' portfolios."

That's not to say that redemptions aren't concerning. Some big investors, like pensions, are pulling out, citing hedge funds' high fees and underperformance. Around one in five investors are reducing their hedge fund allocation, according to the survey, with many putting their money into private equity instead.

Investors yanked nearly $21 billion from the $3 trillion industry in June — the first month that even big funds that performed well last year saw money flow out, according to eVestment, a data tracker.

But some in the industry don't think that that's necessarily a bad thing.

"It seems like the industry is about to shake itself out," Jeff Hudson, a partner at Cedar Ridge Partners, said in a recent chat with Business Insider. "It's probably overdue."

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An employee of Bridgewater Associates who filed a sexual-harassment complaint against his supervisor has withdrawn the claim and started a new job at private-equity firm KKR.

With about $150 billion under management, Westport, Connecticut-based Bridgewater is the world's largest hedge fund.

Chris Tarui filed a complaint earlier this year with a Connecticut agency, alleging the harassment and describing Bridgewater as a "cauldron of fear and intimidation" that kept him silent.

Tarui, who raised money for the hedge fund, withdrew his claim earlier this week and did not receive any financial compensation from the firm, a Bridgewater spokesman said.

Bridgewater also agreed to withdraw Tarui's employment restrictions, the spokesman added. Typically, Bridgewater employees are bound to noncompete agreements. The supervisor who is alleged to have harassed Tarui is still employed at the hedge fund.

After the The New York Times last month reported on the complaint, Bridgewater founder Ray Dalio called the Times' story a "distortion of reality."

Still, the case has drawn scrutiny to Bridgewater's unique culture, which Dalio describes as radical transparency. At the fund, employee conversations can be recorded and viewed by other employees.

Like many companies, Bridgewater requires workers to agree to settle claims in private arbitration, keeping matters out of public view. The public agency filing in Connecticut, however, revealed the details of the allegations.

Reached by telephone, Tarui declined to comment. His LinkedIn page says that he started as a director at private-equity firm KKR this month. A KKR spokeswoman confirmed the move.

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Tourbillon Capital Partners, a $3.7 billion New York hedge fund, was one of the hottest new fund startups when it launched in 2013.

It's not doing as well this year, and founder Jason Karp offered an explanation: low interest rates.

"This entire phenomenon is related to global rates and lack of return alternatives," Karp wrote in his firm's second-quarter investor letter released last week, a copy of which was reviewed by Business Insider.

In other words, Karp is saying that market conditions are such that many hedge funds, including his, are struggling to make money.

The average hedge fund has returned about 3% this year through July, according to data provider HFR. Tourbillon was down 12.9% over the same period.

Here's more from the letter:

"With unprecedented zero and negative interest rate polices all over the globe (ZIRP and NIRP), investors are searching for substitutes for bonds that look stable, boring and have dividend yield. Financials have logically been the underperforming sector as they generally make higher margins with higher rates (net interest margin). However, sectors that typically have non-cyclical growth (health care, technology and discretionary) have dramatically underperformed ... As a result, the sectors that worked in the first half of 2016 are not where hedge funds traditionally traffic, especially for [Tourbillon].

"As interest rates rise, the stock market on the whole often suffers — and that’s when active managers shine. As rates fall, the average outperformance of active funds declines, and indexing looks better."

The letter also notes the strange nature of current stock performance, where cruddy companies are posting strong gains:

"Amazingly, the best performing quintile of stocks over the last 9-months have negative revenue growth! This has only happened three times since the 1950s. Imagine an analyst coming to you and pitching a group of longs that has negative revenue growth because they think the market will just keep inflating the multiple as the fundamentals deteriorate."

Tourbillon's flagship fund, which makes long and short bets on stocks, has fallen 12.9% through July, according to a person familiar with the matter. The fund was up 1.5% in the second quarter, according to the letter.

That's following strong gains previously: 10.8% last year, 10% in 2014, and 21% in 2013.

Tourbillon is a relatively young hedge fund, launched in January 2013 with just $250 million, according to Hedge Fund Intelligence. The firm swiftly raised assets as many of its competitors struggled to raise money.

The firm oversaw $2.3 billion last year, and that figure has grown to $3.7 billion. About $3.2 billion of that cash is in the firm's flagship hedge fund.

Karp was a portfolio manager at Steve Cohen's SAC Capital and a co-CIO at Carlson Capital.

Despite headwinds this year, Karp is sticking to his strategy, saying high-quality picks will eventually rise in value.

"What has caused most of our negative alpha on the long side in the last 9-months is precisely where the best opportunities are lurking," he wrote. "In a low to no-growth world, we believe companies that can grow in spite of no natural GDP tailwinds will command a premium over time."

One of Tourbillon's top investments for the second quarter was Dish Networks, the letter said.

Tourbillon's other best stock picks were Post Holdings, American Homes 4 Rent, Pfizer, and AT&T. Its worst were three unnamed mid-cap shorts, Synchrony Financial, and Alexion Pharmaceuticals, a long investment.

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