Hedge funds improve performance but still fail to beat indices

Equities_going_upMany hedge fund strategies made positive returns in January yet only one managed to beat the S&P 500, researchers found.

Strategies that invested in distressed securities or long-short equities returned more than 3% each in January, while event-driven strategies returned just less than 3% and global macro made slightly more than 2%, said the Edhec-Risk Institute. Short selling made the only loss with nearly -7%.

However, the S&P 500 gained 4.48% in January, suggesting that many investors would have been better off with an index fund than a hedge fund that month.

The emerging markets strategy beat the index, returning 4.55%. But this result is perhaps less impressive given that the MSCI emerging markets index returned 11% in January.

The positive returns in the first part of the year recorded by all but one strategy are an improvement on 2011, when the average hedge fund lost 5%.

The recent past has been difficult for hedge funds. US data provider Barclay Hedge says total hedge fund assets, excluding funds of funds, declined more than 10% to $1.6 trillion (€1.2 trillion) in the six months ending 31 December 2011.

Data from another firm, Hedge Fund Research, says total assets have not varied much around the $2 trillion mark during 2011. But Hedge Fund Research did find that hedge fund launches declined and liquidations increased during the year.

Smaller hedge funds are feeling the most pressure. With fewer assets, their management fees are lower, and during the difficult periods of 2011, few funds generated performance fees.

There is also a growing compliance and regulatory burden that small firms are struggling to bear. Industry insiders say there is likely to be consolidation, especially once hedge funds come to be regulated under the Alternative Investment Fund Managers (Aifm) directive.

On top of these worries, hedge funds are facing renewed criticism from some quarters about the way they charge clients.

“There can be no justification for the fee structure adopted by the majority of the [hedge fund] industry - the infamous two and twenty - 2% of assets under management and 20% of any gains,” said Terry Smith, chief executive of Fundsmith, during a recent lecture in London.

“If any of you think that this fee structure helps to align the interests of investors and fund managers, I suggest you give me the cash you have on you. On my way home, I will drop into the casino and play blackjack and send you 80% of any winnings. If there are any.”

©2012 funds europe