The results are in! The first month of the second quarter reveals that 4 months into 2018, hedge fund industry gains stand at a paltry 0.38 percent for the year, according to the HFRI. While one might reasonably conclude that the hedge fund industry is reeling from its lackluster performance record, in fact, the opposite is true.
How Can this Be?
Increased volatility is reflected in the markets overall. The Dow Jones Industrial Average, for example, is in negative territory, with a year-to-date gain of -1.76 percent, and the S&P 500 was down -0.96 percent at April’s end.
For investors making comparisons with the broader markets, hedge funds look very attractive as they bask comfortably in positive territory, gaining three-fold against the S&P 500 and almost six-fold against the DJIA. A few months ago, the idea that hedge fund returns of 0.38 percent would inspire a stampede of investors would have been unthinkable. After all, investors were expecting the industry to return something north of 7.5 percent in 2018.
In contrast, the industry, taken together, gained 6.6 percent in 2017 when weighted by assets, while the S&P 500 gained 21.8 percent, including dividends. Although not impossible, each month that goes by makes this level of performance increasingly unlikely. Apparently, that doesn’t matter.
Despite a Misstep
Aggregate gains may have been stronger but for the hedge fund industry’s premature withdrawal from its net long position in West Texas Intermediate (WTI) crude oil futures and options contracts. These contracted by 3.6 percent, just in the period from April 17 through April 24, 2018. Despite this misstep, hedge funds were able to tout a positive gain for the month.
Hedge fund managers attending the Milken Institute’s 21st global conference on May 1, 2018, were busy extolling the virtues of hedge fund investment and the bright prospects the future holds for the industry. Hedge fund managers in attendance generally expressed the notion of an evolution in the industry, marked by declining fees and increased specialization.
It was rightfully noted that as markets become more challenging, the skill set offered by hedge fund professionals would experience heightened demand.
Although hedge fund returns, year-to-date, fail to impress, when compared to the results achieved by the S&P 500 and the Dow, they are stellar. If hedge fund managers remain focused, avoid further missteps, and hedge appropriately, the industry has the potential to continue to outperform the broader markets.
However, nothing short of a miracle will permit the hedge fund industry to achieve the aggregate gains anticipated by investors in the early days of 2018. What they have done is to demonstrate to investors that they are capable of performance levels that exceed the performance of the S&P 500 and the DJIA.