As 2017 winds down, hedge funds continue their winning streak, posting aggregate gains of almost one-half percent in November. Pressure mounts for the hedge fund industry to replicate those gains in December and deliver 12 straight months of gains in 2017 for the first time since the financial crisis.

Hedge Fund Research (HFR) reports that hedge funds closed out the month of November with a gain of 0.45 percent, pushing year-to-date gains to 7.55 percent. However, before the industry begins patting itself on the back, we must examine how these results relate to the broader markets.

The Dow, S&P 500 and NASDAQ

The Dow Jones Industrial Average is up just shy of 23 percent for the year and the S&P 500 is up almost 14 percent year-over-year, and the NASDAQ is up around 25 percent for the year. Of course, none of these indices is an appropriate yardstick by which to measure hedge fund performance, but they do provide a perspective on where hedge funds, on average, have fallen short of or exceeded investor expectations.

Hedge Fund Year-Over-Year 

November 2016 hedge fund aggregate year-to-date gains stood at 4.60 percent. This year, aggregate gains average 7.55 percent. This translates to improved performance of 64 percent! That’s more than double the relative gains made in the both the DJIA and the NASDAQ, and more than four times the gains made in the S&P 500.

For hedge funds pursuing a long/short equity strategy, the results they achieve might reasonably be compared to the S&P 500, and the comparison would be a favorable one in 2017. Unfortunately, for many of the other strategies pursued in the hedge fund industry, no rational performance metric exists.

Who Decides?

At the end of the day, how successfully hedge funds have performed is decided by their investors. Fortunately, for hedge funds, investors look beyond the broader markets. Both investors and hedge funds have strategies. In fact, a significant factor used by investors in choosing a hedge fund is predicated on the strategy that hedge fund employs. Moreover, those who invest in hedge funds often view preserving capital as the principal objective, with gains being a secondary, though important, objective.

Investors vote with their money, and hedge fund flows would indicate that the voters are not abandoning hedge funds. In fact, hedge fund AUM set new record highs thus far in 2017 and that is unlikely to change through the balance of the year.

Final Thoughts 

Hedge funds have every reason to celebrate the results they have achieved thus far. Year-over-year performance gains have improved by 64 percent. Industry assets under management are at an all time high. Hedge fund investors have voted with their dollars and the results of that ballot suggest overwhelming support.

Of course, the year is not over. Things could change for better or worse. However, all the trend lines have been drawn in favor of the hedge fund industry. December’s results are just weeks away, at which time everyone will make their own decision regarding a celebration.

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