Another year of hedge funds not earning their keep Aimed at well-heeled investors, their performance has failed to surpass the broader market in recent years By Ben Marks and Brett Angel DECEMBER 14, 2019 — 8:11AM ISTOCK Blue Little Guy Characters Full Length Vector Art Illustration.Copy Space. Businessman looking through a hand-held telescope with dollar sign and crack, currency crisis (stock market crash) concept. A typical hedge fund requires that any interested buyer first meet the definition of an “accredited investor.” That usually means a person who earns at least $250,000 per year or has net worth of at least $5 million. If you have ever thought about investing in a hedge fund, perhaps you considered that threshold unreasonable. These days, it’s something to be thankful for. The performance of hedge funds has been especially poor in recent years, making it more difficult than ever to justify the cost and restrictions they demand of investors. According to data compiled by financial analytics company eVestment, hedge funds as a category returned 8.9% in 2017 compared to a 21.8% return for the S&P 500. Many will argue it’s not appropriate to measure hedge funds directly against equities. Fine. A basket of 50% global equities and 50% bonds gained 14.8% in 2017, still well above the Hedge Fund Aggregate. Hedge funds, we are often told, reveal their true worth during periods of market weakness and high volatility. Well, the S&P 500 lost 4.4% in 2018, which included an especially sharp decline of almost 20% late in the year. The 50/50 basket of global stocks and bonds fell 4.6% in 2018. Hedge funds, as a category, lost even more (-5.1%). Year-to-date numbers show a continuation of the same trend. As of mid-November, the S&P 500 had gained 23%, the 50/50 basket was up 14%, and hedge funds just 7%. Statistically speaking, the evidence is overwhelming: Most hedge funds simply don’t live up to their billing. As you might expect, their investors have noticed. Through the first three quarters of 2019, hedge funds saw net outflows of $77 billion and have experienced six consecutive quarters of outflows overall. It’s fair, of course, to expect periods of underperformance with any actively managed strategy. But consistently weak returns three years in a row are tough to swallow, especially when the major equity benchmarks have soared to all-time highs. This isn’t, by the way, meant as an advertisement for passive index investing. There is value to be found in the right actively managed strategies, and risk management (losing less during down markets) is a vital component in helping most people maximize long-term returns. But why pay close to 2% per year plus incentive fees for that chance? Not to mention limited access to your money (think: quarterly liquidity), K-1 tax reporting likely to require filing an extension, and a real lack of transparency regarding how the dollars are actually invested. Many private-equity strategies — a “cousin” of hedge funds subject to similar constraints — include capital calls, which contractually obligate you to invest more money into their strategy whenever the manager requests it, regardless of previous performance. Hedge funds have always been a slice of the investment spectrum tailored to the most affluent. They are marketed, and sometimes desired, for their exclusivity. “Only those people successful enough to qualify have access,” is a familiar sales pitch, especially among advisers at large wirehouse firms with profit-seeking Alternative Investment departments. Exclusive is meant to suggest “better.” The catch is that “better” more likely describes the compensation of the salesmen and companies offering these products. So, what’s the true value to be found among hedge funds? A modicum of added diversification. Brochures and product descriptions will highlight studies showing a portfolio that includes hedge funds displays slightly less volatility and (perhaps) slightly better returns than a similar portfolio comprised only of stocks, bonds, and cash. The difference, however, is typically minor and it would be interesting to ask the person handing out those brochures how much data (if any) from the last three years are included in those conclusions. As in any asset class, there are a handful of exceptions to the rule. Managers who can boast long-term records of outperformance, higher risk-adjusted returns, and legitimately unique investment approaches. Good luck, however, getting access to the best and brightest of those. Even accredited investors are often shutout from the most attractive hedge funds, who long ago closed their doors to new investors, only accept institutional clients, or require $25 million to start a conversation. It’s also worth mentioning that many hedge funds are not subject to the same degree of rigorous regulatory oversight most investors expect (and deserve) to protect their money. So, if your invitation to join the hedge fund investors club got lost in the mail, there’s no need to feel left out. If, on the other hand, your investment portfolio already includes hedge funds, it might be time to ask again about the liquidity schedule. Ben Marks is chief investment officer at Marks Group Wealth Management in Minnetonka. He can be reached at ben.marks@marksgroup.com. Brett Angel is a senior wealth adviser at the firm. http://www.startribune.com/another-year-of-hedge-funds-not-earning-their-keep/566159101/
Given that hedge funds fundamentally don't attempt to outperform the S&P 500 in up markets, one wonders if the author is actually ignorant or just being obtuse. Sounds like someone who couldn't get a job at a hedge fund and is still a bit bitter about that "wealth management"job they ended up in instead.
Absolutely. Additionally they generally have a hurdle rate that they have to clear before they can get any of their incentive percentage and that is almost never tied to the S&P but instead indexed to some form of the risk free rate. Hedge funds aren't really designed for investors of the mentality of the folks who wrote the article. Not that they're dumb (although they didn't do much to disabuse us of that idea) but because they're not focused on the things institutional investors who buy hedge funds are interested in like correlation to their other holdings, max drawdowns, and various permutations of the Sharpe ratio. Basically Modern Portfolio Theory stuff. In that universe talking about if a fund beat the S&P 500 in a single up year without talking about correlations and risk adjusted returns is rather asinine.
From a customer perspective, index funds/ETFs are cheaper and better. It is accessible to anyone, including the lower-income retail investor. Comparing hedge funds with index alternatives is a natural thing to do. It's small wonder why logical investors will shun hedge funds to embrace index ETFs. The latter has objective long-term track record to prove they are superior and cheaper than hedge funds. As a customer, who wouldn't allocate more to passive indices rather than expensive and under-performing hedge funds?
well this is partially true... as there are some HFs label themselves as equity long short.. in any case, just shows you how difficult it is to beat the spy... didn't Warren won a 10-year $1m bet against some HF index? (I believe that was a 10 year period with the 08 crash included).... that's how pathetic HFs are. and if SPY is so tough to beat, you can forget the QQQ, beating which long term would be comparable to winning a jackpot.. that's why we are all wasting time here..... it's cool to talk about markets and politics and all.... but nobody beats the qqq.
"Another year of writing year-end articles about annual numbers that have no statistical significance" GAT
I guess you mean since the last financial crisis only. Because from the March 2000 high, it took 16 years to just recover. Many HF can do better than 0% in overall return in 16 years. Note: That doesn't include dividends.
Cherry picking data like this is meaningless. 12.5% annualized since nasdaq100 was born in 1986. Untouchable.