Hedge funds managers are supposed to be the smart money; market mavens whose sky-high fees are justified by their ability to outperform.
But guess what? The smart money might not be so smart, at least when markets are rising.
Figures from the latest TrimTabs/BarclayHedge hedge fund flow report showed an outflow of $14.2-billion (U.S.) during all of 2012.
Separate tracking of the performance of hedge funds by country of domicile showed that Canadian funds have the dubious distinction of being the world’s worst last year, with returns of a negative 5.2 per cent. Chinese and Hong Kong funds had the best performance, up 16.3 per cent.
Investors are voting with the money and yanking it from hedge funds because these money managers aren’t beating the market, something you’d think they would be able to do based on their lofty fees. In fact, investors recently would have been better off using a dart board to select stocks.
“Subpar performance helps explain the outflows: Hedge funds managed an 8.5 per cent gain last year while [the] S&P 500 index rose 13.4 per cent and they earned 14.1 per cent from 2009 to 2012 while the S&P 500 rose 27.9 per cent,” TrimTabs said.
The hedge fund industry aims to charge a 2 per cent annual fee based on assets under management and a 20 per cent cut of all profits, but there is substantial discounting.
The survey covered about 3,500 hedge funds across all investment categories, and the decline last year represented 0.8 per cent of assets.
Money flowed out of hedge funds specializing in merger arbitrage, convertible arbitrage, long equities, long-short equities, distressed securities, and emerging markets, among others. Fixed income had an inflow, however, of more than $30-billion.
According to Sol Waksman, president of BarclayHedge, the major reason for the poor performance is that many hedge funds simultaneously long and short stocks. In a rising market, the strategy almost guarantees low returns because the short sales lose money. However, if the market tanks, it’s a different story and hedge funds would be expected to outperform.
For those who want to take a contrary position to the hedge funds, they’re a bullish bunch these days, according to a sentiment survey TrimTabs does with BarclayHedge, which isn’t related to the U.K.-based investment bank.
“Hedge fund managers are largely optimistic about the U.S. economy and the short-term prospects for stocks....Our survey found that bullishness on the S&P500 had surged to a 12-month high and that more than two-thirds of our respondents see less than a 50/50 chance of a sharp correction in the S&P in the first half of 2013. More than half of the managers see home prices rising 1 to 5 per cent this year.”