Hedge funds gripped by crisis of performance

July 28, 2013 12:33 pm

Hedge funds gripped by crisis of performance

By Dan McCrum in New York

Hedge funds have a performance problem. Since the turn of the decade, Wall Street’s master stock pickers have spectacularly failed to beat the market. The crisis of performance comes as the industry is under intense scrutiny over the source of past returns, with SAC Capital facing criminal insider trading charges that threaten to undermine the record of one of the world’s most successful hedge funds. The firm says it has done nothing wrong. While many hedge funds fared better than the stock market during the financial crisis, and rode the 2009 recovery back to health, they have been confounded by sometimes violent market moves over subsequent years.Since January 2010 the average equity hedge fund has produced profits for its investors, after fees, of just 14.5 per cent, according to the research group HFR.

Over the same period an investor in the S&P 500 earned, with dividends, a 55 per cent return: a total which 85 per cent of equity hedge funds have failed to match, finds HFR.

Stock trading specialists at hedge funds fared even worse than their peers managing humdrum mutual funds – 83 per cent of mutual fund managers who invest in large-cap stocks and try to beat the S&P 500 have failed to do so, according to the research group Lipper.

Among all mutual funds investing in stocks, one-third are ahead of the market, and the average investor return is 44.5 per cent from the start of 2010 to the end of June this year, Lipper finds.

The comparison may be unfair to some funds which do not aim to beat the market. Some within the industry argue that hedge funds are behaving as they should, performing better as markets plunge, but lagging behind as they steadily rise.

“We haven’t changed our advice,” said Edward O’Malley, hedge fund consultant for Cambridge Associates, “In the same way . . . we weren’t advising clients to exit hedge funds in favour of long-only funds after the crisis.”

While mutual funds are restricted to simple activities such as choosing cheap companies, hedge funds typically try to use leverage to magnify returns. They may also use hedging to mitigate losses, or sell short stocks in the anticipation of falling prices.

As pension funds embraced the use of cheap index funds over the last decade, such advantages were pitched as a way for hedge funds to improve portfolios.

Yet the poor performance of the last three years now far outweighs hedge funds’ resilience through the worst of the crisis. Over the past five years the S&P 500 with dividends has delivered average annual returns of 7 per cent, while equity hedge funds have produced just 1.7 per cent, according to HFR.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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