Struggling hedge funds could be a ‘canary in the coalmine’ for the global economy

“It is our belief that in their attempt to save the capital markets, global central banks are on their way to destroying them, introducing distortions in asset pricing that have grave implications for the efficient allocation of capital throughout the economy.

“Hedge fund alpha generation, or the lack thereof, should be seen through this lens of inefficient capital allocation. If capital is being allocated at the margin by non-profit driven or non-economic driven organizations – namely central banks – we should expect profit driven organizations that succeed by wringing inefficiencies out of the market to fail. And that appears to be happening, with some acceleration.

Hedge fund returns and alpha are in a way, a canary in the coalmine with regards to global capital allocation efficiency.”

Rosebrook says it is positioned to gain off of this turmoil, however. As long as larger market forces pummel hedge fund returns, the more likely a firm like Rosebrook will be able to buy stakes in funds at a discount.

“The secondary market for illiquid hedge fund interests continues to present Rosebrook with attractive investment opportunities as holders look to exit positions in both recently suspended funds as well as legacy illiquid shares,” the letter noted.

Since June 1, Rosebrook has found more than $625 million of stakes hedge fund investors were trying to sell. In its letter, Rosebrook called that figure a “robust supply.”