Hedge funds - Mixed performance for month and year

Diversification and return, this is what investors want from their hedge funds, but it is the rare case when you can get both. 2019 is shaping up to be no different than the past for the average fund. 

Most hedge funds will have volatilities between bonds and stock indices. Hence, if you want more return, there has to be an improvement in the return to risk versus traditional assets to gain versus the benchmark alternatives. This improvement in return to risk requires skill. There can be gains from diversification of investing styles and risk premia but finding value and exploiting inefficiencies are the keys to any return gains. Year to date, hedge funds, on average, have not been able to generate strong absolute returns. At best, the average fund is generating just over 2 percent. Equity managers have done slightly better given the market gains earlier in the year. 

Investors expect diversification from their hedge fund investments. Yet, it is exceptional to find managers who have low correlated with traditional assets and still generate strong absolute returns. In most cases, hedge funds will have dampened returns versus traditional assets as the case in May for most strategies.

This does not mean hedge funds have failed investors. Rather, there is a mismatch between expectations and reality. Investors have to taper their expectations and understand what is exceptionalism within the hedge fund space. Diversification benefit with return is exceptional.