Hedge Funds Have Failed To Participate In Equity Rally
As the market continues on its steady path to the stratosphere, first it became apparent that pension funds did not participate in the run up due to their significant reduction in equity exposure around the March max pain. What might come as more of a surprise is that according to the HFRX Global Hedge Fund Index (HFRXGL), even hedge funds are broadly underperforming the rally. Which is why aside from various Reuters articles claiming the contrary, hedge funds are mostly on their toes regarding their staffing decisions, as many funds are dealing with disgruntled investors who are confused why they are paying 2 and 20 for levered positions in equities when they could have generated better returns outright.
A comparison of the S&P500 with the HFRXEGL indicates that not only have hedge funds (up 8.7% YTD) failed to beat the broader market (13.5%), but the inverse gap currently is at the year's wides.
The reason for this is well known: prevalent skepticism over the actual economy, together with a disbelief in a computer and HFT driven rally (hedge funds tend to see beyond the volume of 5 financial stocks accounting for 40% of the NYSE volume), resulted in a negative turn in the February-April time frame, with either significant exposure reductions or outright deployment of new shorts.
Hedge Funds are thus faced with the triple whammy of deplorable returns in 2008, an insurmountable high water mark, and a failure to participate in the most orchestrated rally since the great depression. Furthermore, performance statistics indicate that fewer than 10% of hedge funds have recovered their losses from 2008/early 2009. So when you see Reuters articles about hedge funds hiring, take them with a big grain of salt.