DEEP CRACKS are starting to show in the love affair between hedge funds and their investors, after another year of paltry returns on expensive investments leaves many feeling cheated and close to bailing out.
An asset class once feted for its ability to make money in all markets is back under the spotlight after the average fund lost 4.4 per cent in the first 11 months of the year, data from Hedge Fund Research shows.
That tepid performance comes just three years after hedge funds lost an average 19 per cent in 2008’s market chaos, and raises serious questions about the industry’s future growth, particularly in light of the huge fees the managers often earn.
“I’m disappointed at the level of returns,” said one large institutional investor who asked not to be named. “The hedge fund industry has once again been underwhelming peoples expectations.
“It’s an expensive asset class . . . They’re going to have to have another 2001 or 2003 in the next three to five years if they expect the industry to grow,” he said.
Hedge funds, which made money both in 2001’s tumbling markets and 2003’s rally, have been caught out this year by whipsawing markets and high volatility amid the euro zone’s prolonged and deepening debt crisis.
Equity funds – which often rely on fundamental stock analysis – have been particularly hurt, while macro funds, which bet on stocks, bonds, currencies and commodities, have also left some investors disappointed.
Star managers have suffered, notably John Paulson, whose Advantage fund was down 47 per cent to the end of November. Crispin Odey’s European fund is down 15 per cent to end-October, despite big gains in autumn.
“Most hedge funds have a cash benchmark so one really wants to ask – have they been better than cash after fees? My sense is that many have not,” said Patrick Rudden, head of blend strategies at AllianceBernstein.
A review of hedge fund performance by HSBC shows huge variance of over 80 percentage points across the industry in 2011. While the Paulson Advantage Plus fund was the worst performer, the Renaissance Institutional equities fund had advanced 32 per cent by December 9th. – (Reuters)
