Hedge Funds Poor performance in 2013

Looks like 2013 was a poor year for Hedge Funds.  The 2 and 20 crowd have failed to keep up with the market this year and have been consistent laggards for awhile.  Per Bloomberg.

The funds returned 7.1 percent in 2013 through November, according to data compiled by Bloomberg. That’s 22 percentage points less than the 29.1 percent return of the Standard & Poor’s 500 Index, with reinvested dividends, as markets rallied to records.

 In another excerpt:

Hedge funds posted a 0.2 percent gain in November, according to the Bloomberg Global Aggregate Hedge Fund Index. They’ve underperformed the S&P 500 by 97 percentage points since the end of 2008. Some managers cite government intervention in markets, record low interest rates, declining trading volumes and assets moving in unison as reasons for limiting their ability to outperform.

In a Bloomberg View piece, Barry Ritholtz adds:

 Prior to 2008, you need to go back to 1993 to find similar outperformance, when they were up 31 percent versus a 10 percent increase for the S&P.

Does this performance stop people from investing in these vehicles?  The simple answer is no.

The mixed performance hasn’t dissuaded investors. Clients added $53.2 billion to the industry in the first nine months of the year, compared with $34.4 billion for all of 2012, according to HFR, as consultants emphasize individual managers’ risk-adjusted returns, which incorporate the amount of risk taken to generate profits. 

In a piece this summer in WSJ Jason Zweig wrote about how the people who invest in hedge funds seem to do so blindly.  As he says while closing his article:

Perhaps we should be indicting—not criminally, but intellectually—an entire ecosystem. Yes, plenty of hedge funds are guilty of exploiting their clients with lavish fees for flaccid performance; some might even be breaking the law. But their clients are far from blameless: "Sophisticated" institutional investors still insist on believing in a Tooth Fairy that can somehow miraculously provide market-beating returns for everyone. Maybe that is the biggest crime of all.

To get a better idea on the mentality inside the head of the people running investment pools, Josh Brown posts a reply that he received in response to his blog entry on the subject of hedge funds and why professional investment pools insist on continually paying these high fees in spite of the poor returns from a man inside the industry.