Interesting piece via Reuters but frankly there is so much institutional, pension, endowment cash – and so few avenues for it to be applied, I don't see any large scale hedge fund defections even with the fee structure. But with the mass correlations in markets, along with almost every day being 'risk on' or 'risk off', the alpha generation powers of these funds has certainly suffered. That goes for all investors – these past 6 months have been amongst the most difficult I can certainly remember.
- Deep cracks are starting to show in the love affair between hedge funds and their investors, after another year of paltry returns on expensive investments leaves many feeling cheated and close to bailing out. An asset class once feted for its ability to make money in all markets is back under the spotlight after the average fund lost 4.4 percent in the first 11 months of the year, data from Hedge Fund Research shows.
- That tepid performance comes just three years after hedge funds lost an average 19 percent in 2008's market chaos, and raises serious questions about the industry's future growth, particularly in light of the huge fees the managers often earn. "I'm disappointed at the level of returns," said one large institutional investor who asked not to be named. "The hedge fund industry has once again been underwhelming people's expectations. "It's an expensive asset class … They're going to have to have another 2001 or 2003 in the next three-to-five years if they expect the industry to grow," the investor said.
- Hedge funds….have been caught out this year by whipsawing markets and high volatility amid the euro zone's prolonged and deepening debt crisis. Equity funds — which often rely on fundamental stock analysis (almost useless in this environment)– have been particularly hurt, while macro funds, which bet on stocks, bonds, currencies and commodities, have also left some investors disappointed.
- Star managers have suffered, notably John Paulson, whose main Advantage fund was down 47 percent to the end of November, while Crispin Odey's European fund is down around 15 percent to end-October, despite big gains in the autumn rally.
- "Most hedge funds have a cash benchmark so one really wants to ask — have they been better than cash after fees? My sense is that many have not," said Patrick Rudden, head of blend strategies at AllianceBernstein.
- "Hedge fund performance figures this year should be seen in the context of exceptionally challenging circumstances for all market participants," one industry source said.
- Despite the humble returns, clients faced with volatile equity markets and meager returns on cash and government bonds markets aren't pulling out wholesale from hedge funds because they do not know where to re-allocate to.
- However…data from BarclayHedge and TrimTabs Investment Research on Monday showed investors asked funds to return $9 billion in October, more than three times the amount they pulled in September.
- Data from research group Preqin show the proportion of investors who say hedge fund returns have fallen short of their expectations has risen to 40 percent, compared with 28 percent last year and the 38 percent recorded in 2008's market chaos.
- "In 2008 people were calling the end of the hedge fund industry, but in retrospect people scratched their heads and said, 'the equity market is down 40 percent and hedge funds are down 20 percent. Have they done a good job? Yes,'" the large institutional investor said. "This (year) isn't that. This isn't a 'down 40 percent' year. It's a totally different situation," he said.
- One head of hedge funds at a U.S. bank said the overall industry performance has been "unimpressive" since 2007 and a broad shake-up is needed if managers want to hold onto jittery investors chastened by recent volatility. "Not only is this a second down year in four, but the up years have been in line with the market. So you've had four years that have been in line or horrific," the manager said, speaking anonymously to avoid souring business relationships. "In the new paradigm they should be aiming for capital protection. They should be trying to minimize down-capture and offer a decent amount of up-capture (and bingo was his name-o)…I do have a genuine worry for the industry," he said.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog