Did anyone roll their eyes, just a little, after reading the headline offered by FINalternatives: “HFR Interim Update: Hedge Funds Steady Through Mid-April”. Anyone?
Is it appropriate to applaud the fact that the hedge fund industry is mired in mediocre returns for their investors? Does anyone believe that aggregate returns of 0.21 percent through mid-April are worth crowing about?
While it is breathtaking to be able to report gains rather than losses, the focus is misplaced. Rather than engendering a sense that all is well, industry media reports should emphasize a sense of urgency—a call to action. A glance at the numbers from another perspective demonstrates why this sense of urgency is required.
Aggregate hedge fund returns for January 2017 stood at 1.46 percent. February saw these results decline to 1.01 percent. In March, gains fell once more to 0.68 percent. Gains through mid-April plummeted to 0.21 percent. Does anyone discern a trend?
Using current available data, it is apparent that year-to-date hedge fund gains stand at 3.36 percent. This is grand if your benchmark is the passbook savings yield, but not so impressive when the benchmark, right or wrong, is the S&P 500, which as of April 24 stands at 6.04 percent, almost double that of the hedge fund year-to-date returns.
Headwinds or Excuses?
The aforementioned FINalternatives piece provides excuses for hedge fund performance, which include the European elections and uncertainty with respect to the details of the Trump tax initiative.
Will someone please clarify how these factors uniquely affect the hedge fund industry? In truth, these factors are in play for all investment vehicles.
Even as hedge fund closings outstrip hedge fund starts, hedge fund assets under management are rising. The industry has logged some $26.1 billion in new client money and chalked up a further $23.5 billion in performance gains.
This tells us that the hedge fund industry is exorcising its demons…and the demons are underperforming funds. Frankly, it is high time that investors punish underperformers and reward those hedge funds that are achieving respectable returns.
Where Is the Industry Headed?
Clearly, the economic and geopolitical climate has been a hostile one for many hedge funds. As a result, the industry is witness to an awakening in the investor demographic. Investors, having undergone a trial by fire, are now keenly aware that not all hedge funds are created equal.
Performers are being rewarded and underperformers are folding their tents. Since hedge fund assets under management have grown, even as the numbers of hedge funds have declined, one can be certain that this is clear evidence of a trend. Equally clear, is the fact that investors have not lost confidence in the concept of the hedge fund.
Expect to continue to see significant declines in the number of hedge fund firms, as this movement is almost certain to persist. Naturally, as this trend matures, we will see average hedge fund returns increase, and one will no longer see headlines lauding a 0.21 percent aggregate return.