Larry Swedroe Pities the Poor Souls Who Invest in Hedge Funds

By on January 19, 2013

Larry Swedroe - BAM Advisor ServicesLarry Swedroe, financial author and and director of research for the BAM Alliance, has penned a devastating review of hedge fund performance over the past decade. Swedroe notes the HFRX Global Hedge Fund Index returned just 3.5% in 2012, severely underperforming stock indexes which typically achieved returns well north of 10 percent. The aggregate of hedge funds even underperformed the Barclays Government/Credit Bond Index, which returned 4.8 percent, according to Swedroe.

It doesn’t get any better over longer periods of time either as Swedroe points out:

Over the past five years, the S&P 500 returned 1.7 percent per year, producing a cumulative return of 8.6 percent, while the HFRX Index lost 2.9 percent per year, producing a cumulative loss of 13.6 percent.

It gets really bad when comparing hedge funds to a plain vanilla, medium-risk allocation over a longer time horizon:

Even worse is that if we compare the return of the HFRX Global Bond Fund Index to the return of a balanced stock/bond portfolio — 60 percent S&P 500 Index/40 percent Barclays Government/Credit Bond Index — 2012 marked 10 straight years of underperformance.

Swedroe is perplexed, as anyone appreciative of the damning statistical evidence would be, as to why hedge funds continue to draw investor interest:

Given the poor performance of hedge funds, the real puzzle is why investors keep pouring money into them. The only explanations I can think of are that investors have been dazzled by the marketing pitches of Wall Street and are unaware of the evidence.

Finally, some readers will respond with something along these lines: “Who cares what the average fund does? I only buy the top performers.” The only problem is that the academic research demonstrates that, just as with actively managed mutual funds, there’s no persistence of outperformance of hedge funds beyond the randomly expected.

A sad indictment indeed, especially for those who’ve been duped into the promise of achieving superior risk-adjusted returns.

Back in April 2012, Swedroe wrote an article examining why investors engage in self-destructive behavior [link].

Source: [CBS News]

One Comment

  1. Pingback: Hedge funds disappoint — again – CBS News | FinanceProfessor.com

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