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What Happened to Hedge Fund Returns While U.S. Markets Rallied to Record Levels
Posted by: Damian Illia (IP Logged)
Date: January 20, 2014 05:06PM

Hedge funds are a broad group of investment vehicles pursuing a wide variety of investment strategies. Last year, these funds returned an average of 7.4%. So, let´s take a look at the industry and analyze some results.

The Bloomberg's Global Aggregate Hedge Fund Index is a market capitalization weighted index of hedge funds from all over the world. The index contains over 2,400 Hedge funds representing more than $470 billion in assets. This index is down 1.8% from its July 2007 peak and remains well below the S&P 500 since 2009. Below we present the evolution of the S&P 500 (SPX Index) and the Bloomberg´s Hedge Fund Index (BBHFUNDS Index) for the last five years.

Source: Bloomberg

As illustrated in the chart above, dating back to 2009, the S&P 500 Index has generated greater returns than the ones obtained by hedge funds.  

S&P 500 Best Performance Since 1997

While the S&P 500 surged 30% in 2013 due to gains in consumer confidence and housing rebound in the U.S., hedge funds left well behind. According to a Goldman Sachs Group Inc. (GS) 2013 investor survey, the net return was 9.2% from their portfolios.

Different Strategies with Different Results

According to data compiled by Bloomberg, let's see the return of different hedge funds based on their strategy they use. Global macro Hedge funds make broad market bets on indices, currencies, commodities and other asset classes based on expectations about specific markets and asset classes. Macro managers fell 2.2% in 2013. Moreover, long-short equity hedge funds seek to hedge market exposure in equity investments through long and short positions with some beta exposure (typically from 0.3 to 0.6), and have the flexibility to adjust net beta exposure upwards when markets are rising and downwards when markets are falling. These funds rose 11% last year. Finally, multi-strategy Hedge funds employ a combination of strategies. They increased 6.8% last year.

Hedge Fund´s 2013 Returns

According to data from Bloomberg News and surveys, these hedge funds posted the following gains:

  • Paulson & Co., the third largest hedge fund in the world managing approximately $29 billion in merger, event and distressed strategies, run by billionaire John Paulson (Trades, Portfolio), posted a 31% gain.
  • Hutchin Hill Capital LP, the $1 billion hedge fund founded by Neil Chriss, returned 19%
  • Renaissance Technologies LLC, the $25 billion investment firm founded by Jim Simons (Trades, Portfolio), posted 18%.
  • Moore Capital Management LP, the $12.1 billion hedge-fund firm run by Louis Moore Bacon (Trades, Portfolio), increased 13%.
  • Elliott Management Corp., the of $20 billion hedge fund, whose founder and CEO is Paul Singer (Trades, Portfolio), rose 12%.
  • MKP Capital Management LLC, the $8.5 billion global macro and credit hedge-fund firm, gained 11%.
  • Bridgewater & Associates, the world’s largest and best-performing hedge fund in 2010 and 2011, with $150 billion and run by Ray Dalio (Trades, Portfolio), rose 5.3%.

Final Comment

Although equities have obtained much higher returns, their volatility has been much higher too. However, when compared to bonds and commodities, the performance of the hedge funds looks particularly encouraging and attractive for a diversifier investor.

Hedge funds outperformed the S&P 500 in 1993, when they returned 31%, according to Hedge Fund Research Inc., compared with a 10% increase for the S&P. I should also mention that in 2008 hedge funds last beat the market when they lost 19%, but the S&P 500 had a dismal performance decline of 37%.

The fact that the hedge fund universe includes a wide variety of financial assets strategies makes it difficult for them to outperform in a bull market. According to the performance of 2013, long-short equity and multi-strategy hedge funds reported average increases, while macro funds lost.

Hedge funds have not been able to beat the market in the latest years. Therefore, this will be a new challenge and opportunity for the upcoming year.


Disclosure: Damian Illia holds no position in any stocks mentioned.

Guru Discussed: Jim Simons: Current Portfolio, Stock Picks
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Stocks Discussed: INX, GS,
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