Hedge funds continued to underperform the overall US equity market this year. In the first six months of 2013, the S&P500 index is ahead of the CS Hedge Fund Index by over 10%. That is not entirely unexpected during a bull market however - as was the case in the 90s. Just holding short positions – whether in long-short strategies or as risk-reducing positions – should result in underperformance. The fact that the hedge fund universe includes credit, fixed income, and other non-equity strategies makes it difficult for a broad group of hedge funds to outperform in a bull market. Here is what the CS Hedge Fund Index breakdown by “sector” looked like over time.
Over the past 20 years however (since the beginning of 1994), hedge funds (at least as determined by the CS HF Index) and the S&P500 performance is nearly identical through Q2 of this year. Both indices are showing about 8.6% in annual returns. Read more »
With the recent approval in July by the SEC that will allow hedge funds to advertise and market themselves, I thought it would be a good time to write about what hedge funds are designed for and some risks you should know about. This is not meant to imply all hedge funds are risky or bad investments, because there are some fine hedge funds out there. However, you should be aware of what these investments are because you are probably about to be exposed to their advertising.
1. Who are hedge funds designed for
For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the hedge fund must be accredited. That is, they must meet certain annual income requirements and have a net worth of more than $1 million excluding a primary residence. The idea is that investors who meet these requirements will have a significant amount of investment knowledge. Hedge funds can be thought of as mutual funds for the institutional and ultra-high-net-worth investors.
Hedge funds are generally illiquid investments as they often require the investor to keep their money in the fund for at least one year. They often invest speculatively to maximize capital appreciation. Most hedge fund investment strategies aim to achieve a positive return on investment regardless of whether the market is rising or falling. Read more »
Adam Parker of Morgan Stanley is out with a new report on the S&P 500. He notes that hedge fund alpha has tanked since early 200s and today is still negative, with a drop of about 1700 basis points. At the same time correlation is up making many hedge funds appear to be nothing more than closet index funds. Morgan Stanley sees the S&P 500 (.INX) in 2014 at 1600 in the base case scenario . However, the most interesting data is on hedge fund alpha and hedge fund correlation with the S&P 500 (.INX).