Wednesday, June 8, 2016

The performance problem with hedge funds



Aggregating hedge fund strategies can be a simple way of cutting through the noise of behavior with a large set of individual strategies. Grouping hedge funds by equity, event-driven, macro, and relative value shows why there is concern about hedge fund investing. Looking at the two aggregate indices from HFR, their composite and asset weighted, shows a dismal last 12 months for hedge funds. Since the disruption with the Chinese stock market, no strategy category has made money. There is no question that the last 12 months have been difficult but buy and hold equity investors as measured by (SPY) would have been up slightly over the last 12 months. Barclays Aggregate (AGG) fixed income investments would have been up around 3% over the same period. 

Assuming a zero risk-free rate of return and no beta exposure, hedge funds, in aggregate by strategy grouping, have found no net alpha over the last 12 months. Of course, the dispersion of performance means that there have been winners as well as losers, but simplicity of aggregating information shows that managers are finding limited opportunities.

The big question that does not have an easy answer is whether this performance drag is environmental, a period of limited opportunities, or structural, too much money chasing too little alpha.

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