Investors who want a more substantial return on their money often invest in hedge funds. The rationale is that the experts at the hedge fund know the market better than you do and are at the job full time. Why let a hedge fund trade your money? It is because you expect a better return than if you did the job yourself. So, why is it that investors have stayed in hedge funds over the last several years as hedge funds in general have be hugely out-performed by the S&P 500? Forbes writes about the hedge fund conspiracy of mediocrity in which low returns are coupled with high fees.
The mystery of hedge funds is that their managers earn so much while (on average) their performance is so mediocre. The most recent calculations extend the pattern: Over the five years ended April 30, an investment in an index of equity hedge funds returned 4.83% a year, according to industry-tracker Hedge Fund Research, Inc., while the S&P 500 earned 14.31%-amazingly, three times as much. Meanwhile, Institutional Investor reported that, in 2014-the sixth straight year of hedge-fund underperformance-the managers of 25 of the largest funds earned $11.62 billion, almost $500 million apiece.
One issue is that a hedge fund is not a hedge fund is not a hedge fund. There are some great performers and a lot of dogs. It seems that being a money manager and its new version, a hedge fund manager, is profitable. All you need to do is convince folks that you will make them rich and then hope that they fall asleep over the years and do not notice the losses! Why let a hedge fund trade your money when their results are mediocre? If this is happening you need to get out of that hedge fund, into another or trade your own money.
Not All Clients Are Silent
As profits have stagnated in many hedge funds many client have complained, loudly. The end result of poor profits and dissatisfied customers has caused several well-known hedge funds to close their doors to outside money and focus on managing their own assets. The New York Times looks at how hedge funds close doors due to poor results and investor complaints.
These days, bothersome investors who make too many demands are just one item on a long list of frustrations. Privately, and sometimes publicly, managers complain that it has become harder to make money and that regulation has raised the cost of business.
Add to that six long years of a bull stock market in the United States, and a coinciding six consecutive years of underperformance from the hedge fund industry. The average hedge fund returned 3 percent last year compared with a 13.7 percent gain for the Standard & Poor’s 500-stock index.
As hedge funds go out of business it comes back to the investor or trader to make his own decisions, do his own research of fundamentals and find the best ways to make money trading.
Fear of a Correction
Long term investors typically look for solid companies that will grow year after year. Hedge funds commonly look for companies that will grow rapidly or fall quickly. In either case well placed trades can be profitable. The problem for a hedge fund is that when there is long term steady growth there are no quick and large market swings to generate cash. In fact many hedge fund operators and money managers in general are becoming cautious out of fear of a market correction. Barrons talks about the situation.
America’s money managers have developed a fear of heights. Doctors might call it acrophobia, but investors call it a logical response to a stock market that has more than doubled in the past six years, and now sits just below an all-time high. This widespread wariness is evident in Barron’s latest Big Money poll, in which a record 50% of respondents categorize themselves as neutral about the market’s prospects through year end. That’s the highest neutral reading since the spring of 2005, when 40% were sitting on the fence, and a sharp increase from last fall’s 31%.
If you believe this take on things it may be time to hold cash, buy puts, sell short or simply sit on the sidelines while the market decides what it is going to do.