Hedge Funds: What Have you Done for me Lately?

Here’s an interesting chart of the day for you.  It shows the total returns of the HFRX Global Hedge Fund Index versus the Vanguard Total World ETF.   The results are telling even though the sample size is small.

Had you invested $10,000 in both indices at the beginning of 2009 when the global economy was starting to recover you would have a total return of 11.12% in the HFRX versus 53.41% in the Vanguard Total World fund.  That’s the difference between $11,125 and $15,341.  And that’s before you consider the taxes and fees embedded in the funds.

Perhaps the most interesting point in there is the 2011 performance.  Hedge funds are designed primarily to capture alpha regardless of the investing environment.  They’ve clearly done an okay job capturing some of the upside in recent years, but 2011 was a disaster.  They underperformed the Vanguard Index by 1.3%.   So, not only have the hedge funds failed to capture all of the upside, but they didn’t even protect you in the one negative year.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • SS

    2 & 20 baby!

  • The Undergrad

    Back in ’08 George Soros said the hedge fund community would shrink by up to 75%. How prescient is he?

  • Nils

    You gotta ask yourself, If you can’t pick good performing stocks and want to outsource that to a fund manager, how are you any more likely to be good at picking a good performing manager?

  • AC

    I agree with the point that 2011 was a very poor year for hedge funds in aggregate.

    However, this graph could be telling you a few other points that should have been highlighted:
    1 – Fully invested funds have a higher beta than hedge funds
    2 – Risk assets have surprised a lot of fund managers, particularly if they focus on managing risk
    3 – Many hedge fund managers are average at best, but…

    Your comment about “So, not only have the hedge funds failed to capture all of the upside, but they didn’t even protect you in the one negative year” is crazy.

    What do you want, capture all the upside, … or protect in negative years?? Hedge funds are skill based strategies, with a far wider performance variation between managers. They should not be passively invested in via a broad index.

    It aint over until it is over, and in performance comparison rolling performance is probably more approrpiate to contextualise and measure specific aspects, particularly short term relative performance deterioration

  • InvestorX

    Unfortunatel it is not shrinking – too many wanna bes

  • InvestorX

    Comments are valid. The only thing to mention is that the HFRX index is the worst possible index to use to show HF performance (i.e. it has the worst performance) because:

    – It has an additional layer of fees for the managed account platform on which it is based
    – Adjusted for these fees the managed accounts often show some underperformance vs. the offshore funds, as they are smaller than the latter
    – The managers offering managed accounts are subject to adverse selection
    – Managed accounts often do not include the less liquid strategies like distressed, where a lot of structural alpha opportunities (and manager skill) can be exploited

    On the opposite side of the spectrum is the HFRI Fund Weighted Index, which is not investable, has a lot of upside bias due to survivorship bias and many start-up managers that outperform as long as they are alive. This is the best performing hedge fund index.

    So the true performance lies somewhere ib between the HFRX and the HFRI.

  • Sam A

    All money managers are leeches on savers who have been brainwashed to believe they are not smart enough to manage their own money.

    Buy any random basket of blue chip companies and you are likely to outperform hedge funds. What do these guys know that ordinary investors don’t? What training do they have? An MBA? What a joke.

  • Colin, S.Toe

    “53.41% in the Vanguard Total World fund”

    Should read 15.341%?

  • http://www.orcamgroup.com Cullen Roche

    No, the divide really is 53% vs 11%. I know, it looks like a typo. But it’s not.

  • http://www.avondaleam.com/ Scott Krisiloff

    The average saver may be smart enough to manage his or her own money, but few are disciplined enough. Same goes for hedge fund managers. Some are definitely better than others–the key is to find the good ones.