Hedge Funds Stay Popular despite Their So-So Results

By Stewart, James B | International New York Times, September 4, 2015 | Go to article overview

Hedge Funds Stay Popular despite Their So-So Results


Stewart, James B, International New York Times


Over the past year, hedge funds lost about 3.5 percent on average, compared with the S.&P.'s decline of 1.6 percent.

A surge in volatility. Plunging global stock exchanges. A surprise Chinese currency devaluation.

That was August, among the more eventful months for world markets since the collapse of Lehman Brothers and the 2008 financial crisis. In theory, that's exactly the environment that hedge fund managers have been waiting for. After all, many hedge funds are marketed as helping to smooth out volatility while delivering superior risk- adjusted returns.

So how did hedge funds fare last month?

The results were mixed. The average hedge fund, as measured by the HFRX Global Hedge Fund Index, declined 2.2 percent. In comparison, the benchmark Standard & Poor's 500-stock index ended down 6.3 percent in August, while another benchmark, a standard mix of 60 percent United States stocks and 40 percent bonds, dropped 3.6 percent.

Over the past year, including August, hedge funds lagged far behind, losing on average about 3.5 percent compared with a decline of about 1.6 percent in the S.&P. and a gain of roughly 1 percent in the 60/40 benchmark index. Longer term, hedge funds have underperformed benchmarks over both five- and 10-year periods.

"August was a fair test, and many hedge funds had a tough time," said Simon Lack, founder of the financial consulting firm SL Advisors and author of "The Hedge Fund Mirage." Hedge funds, he said, "have failed to beat a 60/40 mix every single year since 2002, and they're on track to repeat this year."

Hedge funds come in many varieties, but nearly all of them share two qualities: high fees and the premise that they will counter volatility in stocks while generating high returns.

By charging a percentage of assets under management (often 2 percent) and a cut of any profits (typically 20 percent, though some go as high as 40 percent) hedge funds generate lucrative fees in both good times and bad, minting scores of billionaire managers.

Victor Fleischer, a law professor at the University of San Diego, created a stir last month when he estimated that five prominent universities with big hedge fund and private equity portfolios -- Yale, Harvard, Princeton, the University of Texas and Stanford -- paid their managers more than they gave out in financial aid to students.

Does their performance justify the extraordinary pay? Averages like those from the HFRX index include a wide range of performance by individual hedge funds deploying various strategies. Some prominent funds performed admirably in August -- Millennium Management was flat, and Visium Asset Management was up slightly.

But few funds have been so nimble. Many funds that did well in August, because they were betting on a market drop, have poor longer- term records. That was the case for liquid alternative mutual funds, which typically offer investors the same strategies as hedge funds, but without the exorbitant fee structures.

Josh Charlson, director of market research for alternative strategies at Morningstar, examined the volatile week of Aug. 17 to Aug. 24 and concluded that, on average, liquid alternative funds largely fulfilled their goal of smoothing volatility. Returns ranged from a positive 0.2 percent (for managed futures funds) to a negative 4.8 percent (for equity hedge funds), which is much better than the roughly 9. …

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