Sunday, September 12, 2010

2010 Tough Year for the Hedge Fund Complex

With the immense correlations among seen globally, and almost all the important "trading" (I use the word trading lightly, as it's more like placing your bets on black or red) now done in reaction to premarket economic reports... making the market activity moot most days between 10:15 AM and 3:30 PM, it's become a struggle for everyone.  The past 6-8 weeks have been especially brutal at least from this chair - generating any extra alpha is difficult.

"Student body left" trading, in which everyone needs to guess where the S&P 500 will go in the next 3 hours, or 3 days because every asset class (ex US Treasuries) will move en masse, has made almost every historical strategy useless, even though designed by the highest paid (and supposedly brightest) PhDs on Earth.  We can see this in hedge fund returns year to date in 2010... usually there is *some* esoteric strategy that is outperforming but  most strategies are not even matching a flat S&P 500.  [Aug 5, 2010: Hedge Fund Strategies Finding 2010 Difficult] [July 8, 2010: Hedge Funds "Frozen in Headlights" as BiPolar Market with 1:1 Correlation in All Things Not Named U.S. Treasuries Causes Confusion]   "My" category (long/short) is especially weak, but I can understand why - bad stocks go up along with good stocks as 90% days become common place (the herd runs left)... and good stocks go down with bad stocks when the herd goes right.  Hence doing any homework or fundamental analysis means nothing in the Ritalin era of the stock market.

(data through July 31, 2010)

Strategy% YTD Return

Dow Jones                                                0.36
S&P 500                                          (1.20)
Nasdaq                                                    (0.64)

Mortgage-backed arbitrage                       1.14
Convertible arbitrage                                 1.05
Asset-backed arbitrage                             0.98
Distressed                                                 0.45
Fixed income arbitrage                              0.10
ALL FUNDS                                          (0.23)
Global Macro                                          (0.44)
Multi-strategy                                          (0.83)
Merger arbitrage                                      (1.34)
Market-neutral                                         (2.01)
Equity statistical arbitrage                         (2.39)
CTA/managed futures                              (3.45)
Long/Short equities                                  (4.09)
Fixed income arbitrage                             (4.19)
Short-biased equity                                  (5.24)

Bloomberg Hedge Fund Indices (most recent returns)

hat tip T3Live

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