This has not been a great year for Hedge Funds. As The Economist reported, the “HFRX, a widely used measure of industry returns, is up by just 3%, compared with an 18% rise in the S&P 500 share index.”

This is not a mere one off, a single year’s underperformance, but rather, symptoms of a much deeper, longer lasting problem:

“The S&P 500 has now outperformed its hedge-fund rival for ten straight years, with the exception of 2008 when both fell sharply. A simple-minded investment portfolio—60% of it in shares and the rest in sovereign bonds—has delivered returns of more than 90% over the past decade, compared with a meagre 17% after fees for hedge funds (see chart below). As a group, the supposed sorcerers of the financial world have returned less than inflation.”

Now, there are a few caveats to this:

Sturgeons law certainly applies to the more than 8000 Hedge funds.  If you are lucky enough to be invested with the top decile of managers this year, they have “served up returns of over 30%.” And the very top tier of hedgies have crushed it over the past (insert your preferred time period here) ____ .

But that’s looking backwards — its quite easy to say who were the best performing hedge funds the past decade. The trick is being able to identify who will be the best  performers over the next decade. That is a skillset that even the biggest and best endowments, pension funds and individual investors seem to lack.

Note that these issues are before we even reach the question of enormous 2&20 fee structure. “Gallingly,” writes The Eeconomist, this underperformance comes as “the profits passed on to their investors are almost certainly lower than the fees creamed off by the managers themselves.”

Expect this to be a continuing issue int he coming decade.

 

 

Previously:
How Hard is it to Become the Michael Jordan of Trading? (July 14th, 2011)
 
Source:
Hedge funds Going nowhere fast
Economist, Dec 22nd 2012
http://econ.st/VQciW5

Category: Hedge Funds, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “Another Mediocre Year (Decade) for Hedge Funds”

  1. Lyle says:

    If you read more More Money Than God its clear why this happens: Say I invent a new strategy for a hedge fund, but since I can neither patent nor obtain any other intellectual property protection on my strategy, as time passes others will figure out the strategy, and if successful will copy it. If very successful a lot of folks will copy it, and then the returns will decrease to the market mean at a minimum because everyone is doing it. This appears to be the curse of hedge funds, if you are successful you will be copied and soon your strategy will no longer be successful. One could call this the revenge of the efficient market as an alternative, since hedge funds largely exist to make money off the inefficiencies of the market eventually enough folks pile in that the inefficiencies in question get ironed out.

  2. “…— its quite easy to say who were the best performing hedge funds the past decade. The trick is being able to identify who will be the best performers over the next decade. That is a skillset that even the biggest and best endowments, pension funds and individual investors seem to lack.

    Note that these issues are before we even reach the question of enormous 2&20 fee structure. “Gallingly,” writes The Economist, this underperformance comes as “the profits passed on to their investors are almost certainly lower than the fees creamed off by the managers themselves.”…”
    ~~

    “…That is a skillset that even the biggest and best endowments, pension funds and individual investors seem to lack…”
    ~
    “…That is a skillset that even… pension funds… seem to lack…”
    +
    “…“the profits passed on to their investors are almost certainly lower than the fees creamed off by the managers themselves.”…”
    ~

    “…Taxpayer-funded public pension funds are private equity firms’ biggest customers, and the private equity industry has control of an estimated $240 billion or more in taxpayer-funded public pension fund money, based on our analysis of financial statements from 88 pension funds from all 50 states.

    And it’s this taxpayer money — used to buy and flip companies in secretive, private deals — that has fueled the wealth of some of the richest men on Wall Street.

    Watchdog City’s story “Trusting Wall Street’s Wizards Behind the Curtain: More than $240 billion in public pension money locked in secretive private equity deals” explains growing concern among some public pension fund managers, academics, union leaders and federal regulators about:
    ■ the accuracy of accounting of private equity investments held by pension funds,
    ■ whether private equity firms are providing misleading information and cutting secret side deals that give preferential treatment to certain influential investors,
    ■ and whether pension funds — and taxpayers — are getting ripped off by fees and hidden conflicts of interests.

    Meanwhile, private equity industry leaders have launched a public relations campaign to dispel myths about an industry they say pumped more than $140 billion into U.S. companies last year and at the same time provided positive returns for the public pension funds that secure the retirements of teachers, police officers and public workers around the country.

    The chart presented here shows the private equity holdings of 88 state and local pension funds, including public employee funds in all 50 states.

    See the accompanying story: “Trusting Wall Street’s Wizards Behind the Curtain: Public Pension Funds have more than $240 Billion invested in secretive private equity deals”

    For more information, contact Gina Edwards at ginavossedwards@gmail.com
    http://www.watchdogcity.com/storyinfo/204-StatebyState-breakdown-of-highrisk-secretive-private-equity-holdings-by-public-pension-funds.htm

    Yet, another facet of..”People, welding their own Manacles, Never, even, learning ‘How to Light a Torch’..”
    ~~

    Note: this..”…— its quite easy to say who were the best performing hedge funds the past decade…”

    is the source of the ‘Cover Story’/’Sales Pitch’/’Pimp Line’..

    ~”8%? Is that All you Need?…”

  3. joepie2 says:

    See:
    http://www.priceactionlab.com/Blog/2012/12/fundbusters/

    Another reason for hedge fund returns slowly down.

  4. DeDude says:

    MEH;

    I think you are pointing to a huge problem in the public pension fund system. Hedgefunds and private equity predators bribe the managers of these funds to invest, and then they harvest their 2&20 or other absurdly excessive compensations. They get out with huge profits and the public pension fund end up with a huge underfunding problem, because they didn’t even keep up with inflation. The underfunding then further induce risk taking and set the public funds up for additional exploitation by the Wall Street thugs.

    We need a ban on public pension funds being invested in anything that charges more than 1% in total cost.

  5. DeDude,

    it’s, a lot, like that.

    those ‘Managers’ –”…bribe the managers of these funds to invest…”–are the ‘lynchpin’ of the Whole Cycle..

    anywhere, the Question..”Who was Buying that Stuff?”..needs to be Answered.

    though, as We’ve seen, ‘Regulation’, or not, if the ‘Cained Peep don’t care to Pay Attention, it’ll, always, Cost them..(they’ll, continue to, be accosted..)

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