A Familiar Story: Hedge Funds Lag Again

By on July 4, 2012

For the privilege of paying exorbitant fees, investors in hedge funds have suffered the indignity of underperforming a simple indexed stock/bond portfolio yet again. ETFReplay reports that year-to-date, hedge funds as a whole are showing a gain of around 1% while a simple 60/40 stock bond portfolio has appreciated over 6%. Longer term studies have demonstrated hedge funds to be poor investments [link]; also over 7 years [link].

Hedge Fund Performance 2012

One of the great mysteries in the world of finance is why anyone would invest in hedge funds given fees that while, supposedly falling, still reportedly average over 1.5% annually along with a performance fee of over 15% [Source: Hedge Funds Review]. This userous level of fees virtually eliminate any gains to the investors in the average hedge fund.

One Comment

  1. Tommy Voeckler

    July 11, 2012 at 3:14 pm

    Bloomberg has an article on why hedge funds lag index funds.

    From the article by Charles Stein: The main Bloomberg hedge fund index, which is weighted by market capitalization and tracks 2,697 funds, fell 2.2 percent a year in the five years ended June 30. The Vanguard Balanced Index Fund (VBINX), which has a 60/40 split of equities and bonds, gained 3.5 percent annually and the S&P 500 Index gained 0.2 percent a year.

    One problem mentioned is their large scale is making it difficult to find opportunities. David Swensen says the fees hedge funds charge are also a huge drag on returns.

    Despite these issues, it is expected hedge funds will grow because of a desperate quest for returns in a low rate environment.

    Hedge funds are probably growing because many individuals in charge of pensions and endowments are math challenged, because simple math reveals they are a particularly dangerous financial potion.

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