Wednesday, September 12, 2012

Hedge funds punished for being too defensive

After performing poorly in 2011 (see this discussion), hedge funds on average are barely up for the year. Many loaded up on sovereign CDS protection in preparation for the Eurozone mess worsening, but got blown out by Draghi's "save the euro" campaign (see discussion). Some maintained large cash positions or significant short equity/credit exposures, all of which resulted in underperformance.

Broad hedge fund index (CS/DJ) vs S&P500 (through 9/7/12)

Being defensive (on top of charging high fees) simply has not been a "winning" strategy lately. It's difficult to actively manage assets based on the whims of central banks rather than economic fundamentals.
FINalternatives: - “Hedge funds continue to learn a hard lesson,” added Gradante. “‘Don't fight the Fed… Regardless of Fundamentals’ should be the bumper sticker for this market. Sitting in cash, being defensive and waiting for the other shoe to drop has been a poor strategy during the last 12 months.”
Some investors simply have had enough of poor performance and are starting to redeem.
Reuters: - Investors took more money away from hedge funds in July when they asked for $7.4 billion back, underscoring their frustration with an industry that has long promised to make money in all markets but is currently delivering only middling returns.

July's redemption requests were up sharply from the $4.2 billion pulled out in June, according to data released by BarclayHedge and TrimTabs Investment Research on Tuesday [Sept. 11]. That leaves hedge funds industry assets at roughly $1.87 trillion, down 23 percent from their peak four years ago before the financial crisis hit, the research report found.

"We've seen a notable reversal in hedge fund industry fortunes during the past year," said Sol Waksman, founder and president of BarclayHedge.

This is troubling news in an industry dwarfed in size by the mutual fund industry but able to attract some of the world's savviest investors with the promises of big paychecks and more investing freedoms.
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