Record breaking index growth (e.g. the S&P 500’s positive percentage change stood at 11.39%) in the year ending 2014, highlighted a comparatively lackluster year for hedge fund performance, which, on average, showed modest gains averaging around 3.5%.
Despite a less than banner year in terms of returns, a Pyramis Global Survey suggested that only one-third of U.S. institutional investors were disappointed with returns, and CALpers announcing a $4 billion redemption – yet the hedge fund industry continued to expand assets under management at an 8.35% annual clip.
Let’s take a look back at some of the interesting twists and turns in the hedge fund saga through the past year.
2014—Quarters One through Three
The first quarter saw increased scrutiny on SAC Capital Advisors, LLC, as the SEC’s insider trading probe heated up. This stain on hedge funds’ public image was further exacerbated by the media’s year-long string of stories featuring the criminal exploits of worst actors in the industry.
Meanwhile, hedge fund managers tried to gauge the implications of the JOBS Act, which promised to lift the general solicitation ban.
The year’s second quarter saw hedge funds testing investment opportunities in the tech startup waters, while Deloitte puzzled over continued investment inflows into hedge funds and, the 8th SAC Capital Advisors employee was found guilty of insider trading.
Meanwhile, mutual funds were raiding hedge funds for talent in an effort to develop mutual fund offerings that mimicked hedge fund investment strategies. Direxion also flattered hedge funds through imitation, with its plans to launch an EFT that mirrored hedge guru investments.
June opened with the SEC’s first whistleblower award of the year, as the SEC paid out $437,500 to each of two un-named recipients.
With first-half results in the record book, hedge funds continued to trail the performance of the S&P 500, while attracting investor cash to the tune of $72.2 billion through the first 5 months of 2014, bringing total assets under management to a record $2.8 trillion.
The financial media continued to hammer hedge funds for their intractable stance on Argentine debt and CALpers announced redemption plans that rekindled the controversial subject of hedge fund management and performance fees.
The Final Stretch
In the waning weeks of 2014, slanted stories of rampant hedge fund closures surfaced, such as this one in Business Insider. Garnering much less press was the flip side of the coin; the equally significant number of hedge fund start-ups.
While year-end results are not yet finalized, it is certain that the hedge fund industry has baffled all its critics and will achieve something north of $3 billion in assets under management. However, equally indisputable, is the fact that hedge funds will once again underperform as compared to broader markets for the 5th straight year.
The coming year is certain to be a challenging one for the industry. Regulatory concerns, data management and reporting concerns, cyber security and, a sober evaluation of fee structures all loom large in the collective mind of hedge fund managers. As for 2014, let us remember that past performance does not guarantee future results.
