Mind the Performance Gap
Aug 6th, 2009 | Filed under: Performance, Analytics & Metrics, Today's Post
With a sense of optimism now returning to the hedge fund industry, there has been a lot of chatter recently about the time it will take for industry-wide assets under management to return to pre-crash highs (see related post). Most researchers seem to put that date somewhere in the 2013-2014 timeframe. But as we learned in a recent report by the McKinsey Global Institute, some hedge fund managers might not actually stick around long enough to see that day (see chart below left from that report and related post).
The firm calculated the amount of time it would take individual hedge funds to get back to their high water marks – 
where many could once again charge a performance fee. McKinsey found that about half of all funds would reach that magical point within a year while the other half would reach it anywhere from a year to over 4 years. The managers looking at a 4 year recovery were most likely to throw in the towel according to the consultancy.
We recently came across another way of looking at the question of high water marks. In its always interesting (and free) monthly data point, hedge fund data provider Barclayhedge calculated what it calls the “hedge fund performance gap”. This is a measure of the average distance each hedge fund was from its all-time high (based on data up to and including April 2009 for the 1,100 funds in the firm’s database).
It’s a pretty conservative measure because if a hedge fund can never, of course, be above it’s all time high. So nearly all funds have a performance gap at any given point in time. As you can see in the chart below from the firm, even during the boom times there was a performance gap at the average hedge fund. More…
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- An Institutional State of Mind
