Wednesday, July 6, 2011

Average Hedge Fund Down on Year

Some interesting data in this Reuters report - most notably that the average hedge fund (via data from Hedge Fund Research) is down 2.1%, trailing the S&P 500 by some 8%. If not for the furious rally in the closing 4 sessions of June, I would imagine that gulf would be much smaller.

  • The first half of 2011 has been humbling for many of the $2 trillion hedge fund industry's biggest stars, with the likes of John Paulson, David Einhorn, and Louis Bacon losing money for their investors' money while underperforming the major U.S. stock market indexes.
  • At the year's half-way point, the average hedge fund was off 2.12 percent, preliminary data from Hedge Fund Research show. By contrast, the Standard & Poor's 500 gained 6 percent. 
  • Only six months ago, few investors would have forecast that as of June 30, Paulson's flagship Advantage Fund would have lost 15 percent, or Einhorn's Greenlight Capital would be down 5 percent. Even Louis Bacon's flagship Moore Global fund, which has boasted average annual returns of 19 percent for more than two decades, was down 5 percent for the year through June 16.
  • The lackluster performances from so many top managers come at a time when the hedge fund industry is perceived to be roaring back to life following the financial crisis.  In the first quarter of 2011 alone, hedge funds took in $32 billion in new money from pension funds and other institutional investors, more than half the amount added during the entire year of 2010. Thanks to fresh demand, especially from pension funds, the industry now manages more money than it did before the beginning of the crisis during the summer of 2007.
  • "The glory boys have had a tough time lately," said Charles Gradante, co-founder of Hennessee Group, which invests with funds and tracks industry performance.  Poor performance is sparking worry that unless these managers turn things around soon, some of the industry's biggest names will be hit with redemption notices in the second half of the year. A wave of requests from investors to get some, if not all, of their money back could force some managers to quickly liquidate positions to return cash fast.
  • William Ackman, whose Pershing Square Capital has delivered an average annual gain of 19 percent until now and is often down early in the year, was off 2.27 percent during the first first 5-1/2 months of the year. 
  • Digging into the mid-year numbers, it appears many funds were fairing poorly thanks to one brutal month. Overall, funds were down 2.09 percent in June, marking their biggest decline this year, data from Bank of America Merrill Lynch analysts show. 
  • The bulk of hedge funds pursue an equity long/short strategy and these funds, on average, lost 3.07 percent in June, the analysts said, noting that only equity market neutral funds, as a group, posted positive returns in June.
  • For many managers, the hardest thing to gauge correctly this year has been the roller-coaster nature of the global economic recovery. Funds positioned to profit from an economic rebound by betting heavily on bank stocks and consumer products manufacturers were whipsawed by global events.

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