Hedge funds may be nearing all-time highs, but they actually peaked last January
Oct 12th, 2009 | Filed under: Hedge Fund Industry Trends, Today's Post
Last week, we questioned the tendency of managers, whose stated profession is “hedging,” to drift toward the long-biased end of the market exposure spectrum. Why, we wondered, would managers who were apparently agnostic about market direction want to be anything other than market neutral? (True, markets do rise more than they fall, but we’d submit that this beta exposure should be left to the end investor, not the alpha-mandated “hedge fund.”)
Hedge funds have earned accolades recently for cranking out stellar returns. September was a barn-burner for most indices and many hedge fund indices are now within striking distance of their all-time highs.
But how much of this is simply due to the tailwind of rising markets? Don’t get us wrong, market timing is a legitimate way to generate alpha. A manager who has a positive market correlation on the way up and a negative one on the way down is a hero in our books. But we get a little uncomfortable with the praise being lavished on hedge funds in aggregate this year.
And we’re not the only ones. In the August edition of its monthly “topical study” Barclayhedge warned that:
“…recent hedge fund returns do not suggest fund managers prepared better for a repetition of last year’s sell-off.”
The firm found the strategies that took the biggest hit last year are roaring back with a vengeance this year. This scatterplot from the report makes the point:
Although Barclayhedge chalks this up to certain trades taking a hiatus in 2008 (carry etc.), a skeptic might suggest that this performance was just indirectly – or even directly – the result of equity beta suffering last year and coming back this year.
Still, as the chart below from HFR illustrates, hedge funds have shellacked the markets over the past 2 years – even while they underperform them so far in 2009.
If anything, this year’s positive (if not market-beating) performance serves to highlight the fact that hedge funds avoided the 40%+ losses endured by equities last year.
In a sense the “all-time high” for hedge funds happened nearly a year ago. The chart below created with data from HFR and Yahoo! Finance shows the cumulative compounded outperformance of the HFRI Composite Index over the S&P 500 (Total Return) Index.
By the end of January, as both hedge funds and the markets were down for the count, the relative outperformance of hedge funds hit its all-time high. Since then, both indices have been getting up off the mat. Shocked back into consciousness, equity markets are flying like a butterfly and stinging like a bee, while hedge funds have been a little more groggy. The result is that cumulative monthly market outperformance of hedge funds has dropped off somewhat. (As alpha purists, we hate to use simple monthly outperformance as a measure of value-added, but in this situation, it makes the point more succinctly.)
Lost amidst the “absolute return” dogma of the hedge fund industry was the fact that last year was the best relative return year in the history of the industry. Ironically, it was last year’s comparatively tame losses that have put the HFRI in a position where it can produce “absolute returns” – over a 2 year period. History may remember that as a more impressive feat than the serendipitous market timing we may be seeing this year.
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[...] all the ruckus in 08′, investing in hedge funds will always be better than leaving it to the [...]
The title suggests that an investor being long a HF or a FoHF ( it is not clear in the title) that the value of his wealth would reach an all time. Pure non sense ! The hedge fund industry has been cut by 2. The institutional investors don’t invest any more in HF. The regulators want to increase the transparency which will lead some managers to stop their activities and last but not least, the frauds are discovered like never before. Are we really reaching an all time high?
Well! George, because it just compare the index , so averagely if the investors invested in FoFH will have more chance to be value added. But for a specific one, it may be not the case.