If you had to pick a field as an exemplar traditionally known for its ethical behavior, money managers (the groups that run hedge funds) are probably not your best choice.
However, hedge funds are facing a much more existential threat: Since the financial crisis, hedge funds have had a difficult time outperforming “the market”—i.e. passively investing in an entire index, like the S&P 500—and have failed to do so far more often than not.
When the economic policies of the country are debated, it usually comes down to fiscal and budgetary concerns: How much do we spend? How much debt do we take on?
Over the past several years, the “recovery” of the U.S. economy has been fueled by rising debt, ultra-low interest rates, and profligate spending. The recent sell-off in Treasurys means that the bond market rout and debt problem could get a lot worse before they get better.
Amid an increasingly risk-off environment for investors, money has steadily flowed into the government bond market at an alarming pace over the last few years. This is especially true for U.S. Treasurys with a longer duration (10 years or more) as investors chase the higher yields they offer.
However, there’s reason to believe this market is getting overheated, meaning the long bull run in bonds could be coming to an end.
Japanese Prime Minister Shinzo Abe, who with the Bank of Japan (BOJ) Governor Haruhiko Kuroda has embarked on an unprecedented amount of quantitative easing known as “Abenomics,” won over enough voters to recently earn reelection for his government.
BOJ Governor Haruhiko Kuroda
This is widely seen as a mandate for him to continue his aggressive, accommodative economic policies. Yet it would almost appear that Abe is willing to boldly declaring the country’s battle with deflation won based purely on a popularity contest with voters.
As bond yields continue to plunge to historical lows, investors are getting fleeced. The more that uncertainty, fear, and uneven economic growth drive investment into the bond market, the more potential income is being forfeited.