According to an analysis by Nasdaq eVestment, an investor who put $US100 into an equity long-short hedge fund 10 years ago would now on average have $US163. However, if they had invested in Vanguard’s S&P 500 tracker with dividends reinvested, they would have $US310. The underperformance of hedge funds compared to index funds has led to growing concerns and questions about the value they bring to investors.
Big-name hedge funds have not been exempt from struggles either. Many high-profile funds, including Tiger Global and Maverick Capital, have experienced significant losses in recent years. London-based hedge fund Pelham Capital and Adelphi Capital have even returned capital and transformed into family offices. These developments have raised doubts about the overall health of the hedge fund industry.
While hedge fund managers have blamed low interest rates for their lackluster performance, the subsequent rise in interest rates has not turned the tide in their favor. In 2022, hedge funds were expected to have a breakout year as higher rates were predicted to differentiate strong companies from weak ones. However, funds only gained an average of 6.1%, while the S&P 500 increased by 26.3%.
Investors, after years of disappointment, are growing increasingly frustrated. The high fees charged by long-short managers are no longer justified by their subpar performance. As a result, assets in equity long-short funds have been steadily declining, reaching levels below those of five years ago.
Despite these struggles, there are still some optimists in the industry. Some believe that shorting is becoming more profitable as higher rates impact poor-quality companies, while others think that a renewed focus on company fundamentals will benefit long-short strategies. However, there is also a concern that a potential decrease in global interest rates in the future could further harm the already struggling sector.
Overall, the performance of hedge funds compared to index funds and the lack of consistent returns have put their long-term viability in question. Investors are increasingly considering alternative strategies and diversifying their portfolios away from traditional hedge funds. Only time will tell if the industry can adapt and regain its former prominence.
Source: Financial Times
Frequently Asked Questions about the Performance of Hedge Funds
1. Why are investors concerned about the value hedge funds bring?
Investors have growing concerns about the performance of hedge funds compared to index funds. While hedge funds have underperformed, index funds, such as Vanguard’s S&P 500 tracker with dividends reinvested, have generated higher returns. This has led to questions about the value that hedge funds provide to investors.
2. Have big-name hedge funds also struggled?
Yes, even well-known hedge funds like Tiger Global and Maverick Capital have experienced significant losses in recent years. Some funds, such as Pelham Capital and Adelphi Capital, have returned capital and transformed into family offices. These developments have raised doubts about the overall health of the hedge fund industry.
3. Why have hedge fund managers blamed low interest rates for their underperformance?
Hedge fund managers have cited low interest rates as a factor contributing to their lackluster performance. They have argued that low rates have made it more difficult to generate returns. However, even with the subsequent rise in interest rates, hedge funds have not been able to turn the tide in their favor.
4. How have hedge funds performed compared to the S&P 500 in 2022?
In 2022, hedge funds were expected to have a breakout year due to higher interest rates differentiating strong companies from weak ones. However, hedge funds only gained an average of 6.1%, while the S&P 500 increased by 26.3%. This further highlights the underperformance of hedge funds.
5. Are investors becoming frustrated with hedge funds?
Yes, after years of disappointment, investors are growing increasingly frustrated. The high fees charged by hedge fund managers are no longer justified by their subpar performance. As a result, assets in equity long-short funds have been steadily declining, reaching levels below those of five years ago.
6. Is there any optimism within the industry?
Despite the struggles, there are still some optimists within the industry. Some believe that shorting is becoming more profitable as higher interest rates impact poor-quality companies. Others think that a renewed focus on company fundamentals will benefit long-short strategies. However, there is a concern that a potential decrease in global interest rates in the future could further harm the struggling sector.
7. What is the long-term viability of hedge funds?
The performance of hedge funds compared to index funds and the lack of consistent returns have put their long-term viability in question. Investors are increasingly considering alternative strategies and diversifying their portfolios away from traditional hedge funds. The industry will need to adapt and regain its former prominence to meet investor expectations.
For more information on hedge funds, you can visit the Nasdaq MarketInsite.
