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Hedge Funds Are Getting Their Teeth Kicked In This Year

Most active managers prove their worth when the market declines.  But what about the other, oh, 75% of the time when the market is rising?  The reality is that being an active manager is incredibly difficult in an environment where the market seems to never go down.  If you’re not leveraged, strategically differentiated, lucky or unusually skilled the odds are heavily against an active manager outperforming a market like the one we’ve seen in 2013 where stocks just don’t go down.  But should the discrepancy look THIS bad?

Here are the YTD returns from the basic approaches:

  • The HFRX Global Hedge Fund Index: +3.77%
  • The all equity S&P 500:  +14%
  • A 60/40 stock/bond portfolio: +8.5%.

Bear in mind you’re probably paying 2 & 20 for that 3.77%.  That’s not bad.  That’s awful.*

When I do portfolio reviews with people I always tell them that Wall Street wants to sell them the Ferrari because it sounds fancy, looks slick, drives fast and, oh yeah, it’s expensive.  But that ignores the reality of life.  We don’t need to get from point A to point B driving 100 mph in a flashy car.  We’ve got our kids in the back, bumps along the way and in most instances that means a more prudent approach to preparing our savings portfolio (yes, you’re probably not an investor!).  Most of us think we want a Ferrari, but for 90% of us a Honda Accord is safer, almost as fast and a heckuvalot less expensive.  And if the recent performance of the HFRX is any tell, that Ferrari you own is probably built with a Go Kart engine….

*  HFRX is net of fees.  

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