Hedge funds performed better - but still lag for the year

July was a good performance month for hedge funds. Given the post-BREXIT uncertainty, hedge funds were able to positively exploit many opportunities, albeit the returns generally lagged the equity benchmarks. Of course, since the market exposure beta for hedge funds is often less than .5, it should not be surprising there were lower returns than the S&P 500 in a strong up market month. 

Hedge funds, in most cases, did better than diversified fixed income benchmarks. In very broad terms, there is a growing view that hedge fund performance should be somewhere between these two major asset class alternatives. By that simple rule of thumb standard, hedge funds did their job.

In spite of the positive gains, 2016 performance does not look especially attractive. Most hedge fund styles are below both equity and fixed income benchmarks. The lower market beta places a drag on returns and alpha production has not been great enough to make up the shortfall. The broad Barclays Aggregate fixed income index has generated close to 6 percent returns which has bested most styles with better diversification. The S&P 500 equity index has done even better. The only outstanding strategy for the year has been distressed investing. Other strategies have not provided the value expected by investors. 

Of course, any seven month period is too short to make judgement on long-term allocations, but the burden is on hedge fund managers to show their skill and value-added for the remainder of the year.