You don't have to look far to find compelling evidence that 2016 was one of the hardest years on record for the multitrillion-dollar professional fund management industry.
The Brexit vote and the election of Donald Trump as the next United States president caused enormous disruption to financial markets and, in some cases, harmed the reputations and careers of legendary money managers.
It is worth exploring what went wrong in 2016 to help understand how investors should respond in 2017.
The evidence that 2016 was a very tough year for those managing retail and institutional money can be found in the performance league tables published by various consultancies, asset consultants, research houses and independent analysts.
The difference between a good and bad performance by a fund manager can be enough to set a portfolio up for years of respectable returns or weigh it down for a very long time.
Latest available figures for the performance of long only equity managers in Australia show the best manager, Allan Gray, had a return in the 12 months to November of 33.7 per cent. The worst return was by CBG Asset Management with a return of negative 0.7 per cent, according to the Mercer Investment Surveys.
It was a similar story in long short funds, which have a mandate that allows the manager to sell stocks short and profit from their decline.
The top-performing Australian long short fund, Macquarie Australia Plus, returned 26.7 per cent in the year to November, while the worst-performing fund measured by Mercer, Regal Australian Long Short, returned minus 4.4 per cent.
In global markets, the creme de la creme of fund managers are working for hedge funds. These have a range of different specialist strategies.
The best-performing hedge fund for 2016, based on the latest available data published by HSBC, was the Dorset Energy Fund which returned 67.29 per cent.
The worst-performing hedge fund was Odey European Inc which returned negative 48.7 per cent.
The appalling performance of the London-based Odey European fund can be sheeted home to the bearish views of its chief investment officer Crispin Odey.
Odey is one of several legendary fund managers who ended up being front page news because of their inability to position their funds correctly for important political events.
The local equivalent of Odey is the once legendary fund manager Peter Hall, the founder of Hunter Hall Investment Management.
Hall is not that different to Odey. Both had impressive track records over more than 20 years. Both had successfully backed their own judgment and achieved consistent long-term returns.
But they made big calls which positioned them on the wrong side of Brexit (Odey) and the election of Trump (Hall).
Hall admitted in an interview with The Australian Financial Review that he "zigged and the rest of the world zagged" in November last year.
Hall made the mistake of betting against Donald Trump's victory. He got stuck with lots of cash and gold mining stocks and lost 7 per cent in the space of a month.
In hindsight, the smart thing to do was to hold lots of boring conservative large-capitalisation stocks, the same sort of stocks that make up the bulk of the assets in the typical self-managed super fund in Australia. Hall also suffered from having too much of his fund's assets concentrated in two companies which experienced share price collapses – Sirtex Medical and Vocus Communications.
"In one month we lost 20 percentage points of relative value," Hall said.
Hall's sudden decision to sell all his shares in Hunter Hall International could have implications for fund flows in Hunter Hall's five unlisted trusts.
Odey's poor performance had an immediate reaction. His Odey European fund suffered heavy withdrawals and lost about €500 million in total value.
Withdrawals were a feature of the global hedge fund industry in 2016 as sophisticated retail and institutional investors responded to poor performance figures. Hedge funds posted a positive return of 3.5 per cent in 2016 but there were net outflows of $US28billion, according to Eurekahedge Research.
Odey is dusting himself off and continuing to manage money. He is helped by the fact that he has a total of $US7.5billion under management in a range of funds.
Hall, however, does not have the stomach for spending the time turning around the performance of his funds. Instead, he is selling out to Washington H. Soul Pattinson.
As one leading local fund manager told Chanticleer: "Peter's track record is impressive."
"Sometimes, when people know that they are going to go through a long hard period of underperformance they pack it in so as not to tarnish that record."
There is one lesson that can be learnt from the experiences of Odey and Hall. If you position yourself wrongly in financial markets you should at least retain the flexibility to move quickly out of that position.
That is something that has been a guiding principle for an Australian hedge fund manager who burst on to the scene in 2016 with a return of just over 100 per cent.
Stuart McAuliffe is one of those larger-than-life characters who has managed to hide his light under a bushel despite claiming to be one of the largest foreign exchange traders in Australia.
McAuliffe came to the attention of the public capital markets in 2016 with the initial public offering for a listed investment company named after English pirate Henry Morgan. Henry Morgan Ltd raised just over $20 million through the issue of shares and options. Anyone who owned both shares and options would have paid $1. The net tangible asset backing is now just over $2.
That is an impressive performance which is partly because McAuliffe made the right calls about Brexit and Trump. These calls are documented in his regular newsletters released to the ASX.
He says the common strategy used by most investors to buy stocks and hold them for the long term "is dead".
McAuliffe said markets were so volatile and so fast moving that investors needed to be in a position to put money in all markets around the world. This means being able to use currency markets, derivative markets, commodities futures and bonds.
Henry Morgan outsources its investment management to a company controlled by McAuliffe called John Bridgeman Ltd. Not surprisingly, this company too is named after a pirate.
The pirate theme stems from McAuliffe's belief that pirates followed a strategy perfectly suited to financial markets. They were highly mobile and willing to attack fast when the opportunities arose.
McAuliffe says his investment strategy is designed to maximise profitability from both rising and falling markets. It targets positive absolute returns over the medium to long term from global markets.
Another fund manager who has examined the Henry Morgan prospectus says that McAuliffe's strategy could be likened to someone who holds a large amount of cash and then bets the rest on black.
McAuliffe says it is more complex and involved than that description but he does agree that to be successful you need to be both defensive and offensive.
It is this combination of skills which he has found in successful military strategists and campaigners such as Napoleon Bonaparte, Julius Caesar and General George Patton.
His big calls for 2017 are a rise in the Australian dollar to at least US80¢, a strong rally in Chinese shares, a rally in European equities and a strong rally in Australian equities.
