Peak Career Risk: Only 8% Of Hedge Funds Are Outperforming The Market

Tyler Durden's picture

Peak career risk. That's how one can summarize what the hedge fund community, long used to "nimbly" outperforming the market populated by slow, dumb money managers and getting paid 7+ digit bonuses, is feeling right now.

The last time we looked at relative hedge fund performance, because let's face it: indexing is a polite word for underperforming and anyone who says otherwise is rather clueless about the asset management industry in which the only thing that matters is always outperforming everyone else, only 89% of hedge funds were underperforming the S&P500 through mid-August. A month later, this number is now up to 92% as of September 14.

Inversely this means that only 8% of hedge funds are outperforming the market with just 3 months left in the year. It also explains the dramatic ramp in the Russell 2000, aka 3x+ beta central, and of course Apple which is the designated hedge fund hotel from which nobody can ever check out, in the past two weeks, as every hedge fund manager has thrown caution to the wind, and in a desperate attempt to preserve their career, is hoping and praying to have some good news for their LPs ahead of the September 30 redemption submission deadline. By the looks of things there will be a scarcity of good news and the capital reallocation out of the losers and into the winners will be fast and furious leaving hundreds of hedge fund managers out on the street.

As a reminder, this is precisely the mindless, idiotic "strategy" we expected would occur when we posted three weeks ago a list of the most shorted Russell 2000 stocks, as desperation forces managers to attempt a short squeeze among these names.

Goldman explains:

S&P 500 has surged 11% since June and the index has now advanced 18% YTD as of September 20th. However, most investors lag the benchmark. The average large-cap core mutual fund has returned 16.3% since the start of the year and 29% of these funds have outperformed the index. The rising equity market has presented an even greater challenge for hedge funds, which by their very nature have some short exposure. The typical levered investor has returned 6.7% YTD through September 14 and only 8% of hedge funds have outperformed the S&P 500 on a year-to-date basis (see Exhibit 1).


Investors have been understandably frustrated given the powerful market rotations in 2012. The S&P 500 rose 13% during 1Q, then retreated by 7% over the following two months, and has rallied 12% since the start of June. Average sector correlation has remained high YTD while the monthly return dispersion has been below average at 29th percentile of the 30-year average.


So what does Goldman, which still has a 1250 S&P price target for year end, suggest: 4 strategiest: i) Sell laggard YTD performers versus S&P 500; ii) ‘Fiscal cliff’ will drive S&P 500 lower in 4Q; iii) Focus on top-line revenue growth; iv) Seek dividend yield and growth. Of course, none of this matters, and what desperate hedge funds will do is chase even more high beta stocks, and rush even more into winners, leading to a gross disconnected between market values and fundamentals.

In other words, expect the unwind to take place long before the market is faced with the fiscal cliff reality, which a multi-year high market will almost certainly not be resolved before year end. The catalyst will be redemption letters, once HFs know who will and who will not be around into year end. Furthermore, those remaining funds will seek to lock in profits immediately once they get fund of funds and other disenchanted LPs rotating capital out of losers and into them, which is all that will matter for the HF community heading into 2013.

So keep an eye on news about whose fund shut down, and whose didn't in the first days of October: that will be the first fire alarm across the entire HF hotel universe.

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Yellowhoard's picture

Quite a few funds were long gold and miners. Their performance should look a lot better as gold hits new highs around the world.

francis_sawyer's picture

We're all 'Leonard the Monkey' now...

AldousHuxley's picture

hedge funds going IPO...

financial terrorists go IPO to exit when the game is done or there is one last bubble.

look at blackstone, goldman, etc.


next big thing in finance is startup incubators...micro PE/VC shops....spread $100,000 around thousands of startups



markmotive's picture

The trick is to get out when the going is good. Most hedge fund managers are nothing but levered beta plays.

Raw footage of the Jim Rogers interview for documentary, 'The Bubble'

Stoploss's picture

Now we know why Ben shit his pants and started eternal QE.

Mut funds are long only, they dont hold shorts.  -- Up 16%

Hedge funds are both, and usually bias to the macro side.  --  8% of funds up 8%


Ha ha ha, there's no one left to sell to!!  LOL!!!

Larry Dallas's picture

I just don't get it. All these guys had to do was simply sit on assets while giving the impression that they are trading, not do anything and let the Fed inflate their way to "decent" returns + management fees.

They just try too hard. Or their arrogance and egos got the best of them.

I've said it before, when history is written, it will most likely show that these guys provided no real performance, and merely just sat on assets.

RopeADope's picture

All they had to do was park in Apple and collude with each other to keep the benchmark underperforming. The SEC allows financial firms to regulate themselves so no worries.

AldousHuxley's picture

that's because they got high off of illegal insider trading scams before but arrogantly believed that it was their smarts which got the results.


Carlyle Group has HQ in Washington DC.

politicians pass law, get out of office, give money to carlyle and tell them what laws are coming, and make it look like carlyle made money for them.


and they also get away from criminal prosecution too....


Carlyle is a major holder of a company called Synagro, a controvercial company that spreads marginally treated human waste, on farm fields to grow food for the American dinner plate. Synagro representatives were caught redhanded in an FBI sting for bribing public officials, yet Carlyle and Synagro escaped prosecution.


Bush Sr. Saudis, all in the scam.


It is public now, so you can get in it too...but it may just be insiders cashing out on public investor's dime.



DoChenRollingBearing's picture

I betcha that almost everyone can do better than the average hedge fund by prudent diversification.  The "2 and 20" model the hedgies use looks to me like too steep a vig for most to come out a winner.

MAYBE, if you are rich, you can dabble with a small %-age in hedge funds, but they are not for me.  Danger!

AldousHuxley's picture

"2 and 20"

quickly becoming 2 winners for every 20 losers...~8% success rate


hey, that matches the current performance.


machineh's picture

Next step after "2 and 20" is "23 skidoo" -- fire their worthless ass.

If you're payin' 2 and 20, you've got SUCKER tattoed on your sloped forehead.

Raynja's picture

This year they will only have to worry about the two

Dr Benway's picture

LOL much more than this: on a risk-adjusted basis, a chimp (with no fees) would do better than a HF manager (chimp with ludicrous fees)

AldousHuxley's picture

on one hand, a chimp is not smart enough to cheat investors out.

Cult_of_Reason's picture

A must watch,  entertaining Howard Davidowitz tells the truth about the economy, QE3, and "certifiably nuts" Bernanke.

JR's picture

Thanks, Cult.

“Bernanke has been consistently wrong… Bernanke is certifiably nuts; his record speaks for itself as does the government record… as we move towards the fiscal cliff…the consumer is going to look at this and go right back in the tank …the consumer has looked at all this and said I’m poorer, 40% of my net worth is gone, I have less income, I’m working less hours, I don’t have a job and I’m in the crapper… “ Howard Davidowitz, September 14, 2012

Hopium on Wall; Pain on Main.


vast-dom's picture

R2K collapse please.

DeadFred's picture

These guys aren't dumb. Why can't they keep up with SPY? My guess has been that the HFTs have been targeting them but it's way out of my league to know that for sure. One would think that all but the dimmest of them HF managers would be able to adapt. Unless the market is adapting against their adaptations at a nanosecond level. The squid smells money?

HD's picture

 Hedge funds are now the dumb money as retail and the muppets are out of the market. The hunters have become the hunted. Melissa Lee may soon be sitting alone on the set of "Fast Money"...

Rainman's picture

Three months remain for hedgies to chase further down the rabbit hole of risk. The flush will be epic.

HD's picture

Not sure they have three months - my understanding is that most redemptions hit in October. Either way, I'll be thrilled to have the S&P sell off a few hundred points.

grid-b-gone's picture

The market goes down when the potential to fleece retail has been tapped for the current cycle.

At that point, it's game theory and only big money players remain at the table. As in poker, as the game progresses, more "all in" bets are made and eventually the big boys fall.

Even if Ben buys most of the market, at some point, he will think of locking in gains, or a couple primary dealers will do it first and he will be the one selling out of fear.

Big players aren't like most of us, needing to succeed for forty years, building a resume with progressively increasing responsibility that leads to higher salary ranges. For these guys, all they need is a few good years, or one huge win.

You don't find leadership collectives in nature, and the human animal is no exception. The bigger the egos involved, the more they will want to determine who the top dog is. 

RiverRoad's picture

They've been going after each other fer sure......look at the dead Whale.

Neethgie's picture

how exactly would hft target hedgies?

DeadFred's picture

They would need access to what the hedge fund positions were. Out of my league to know if they could do this but if they knew a hedge fund had put on a particular trade they've shown the ability to take out stops, get the good trades at .001 cent difference from the hedgie's, etc. If you give me the hedge fund's trade positions I could design a search and destroy algorythm. Do they have access to the data? They shouldn't, but that means very little today. This is not one of my best backed up conspiracy theories, but the fact that 92% of the hedge funds are behind suggests someone is hunting them.

RopeADope's picture

Smaller Primes have been acquired by firms that trade their own book. Giving those firms access to their HF client's books. Goldman and JPM are making a killing off HFs.

Silversem's picture

I create my own hedgefund by copying the best traders

OpenThePodBayDoorHAL's picture

eToro, really? Did you notice how performance is calculated by closed positions only? So all you have to do is close winners only, and leave the losing trades open. Some guys in there have short euro trades from 2010, lol

max2205's picture

Propaganda to make stupid traders feel better?

Buy with Ben, BTFD, don't fight the Fed. No top till everybody jumps on the Benternity Train

max2205's picture

Again. How much is Apple up YTD?

Fidel Sarcastro's picture

I have the S&P beat by a factor of 5. Where is my 7+ digit bonus?

grid-b-gone's picture

The title assumes they intend to outperform the market, which may not be a high priority for them.

In outperformance years, they just take higher bonuses rather than letting profit flow to customers or to move up on some comparative list.

The goal of most funds, even money market funds, is to use OPM and siphon off your own, risk-free cut. Excess profit flowing to customers is a misallocation of fund assets.

As infuriating as it is, anyone who can consistently underperform, yet be compensated far above the median U.S. income has some claim to being the smartest guy in the room. These guys simply have the personality that leads them to fund management, politics, central banking, lobbying, life insurance, and annuity sales.

Retail has been catching on. Hubris has become so blatent that even the dullest of us understand the game.

etresoi's picture

I am actually looking for a fund manager, because I am tired of the work and want to go play.

My record is consistent yoy of 30%+ over S&P, for 10 years.  I show these children, who claim to be hedge fund managers, my records and ask if they can justify their 2&20... no takers. 

I am getting so bored my only option is to stop

fonzannoon's picture

hedge funds have prob been net short. they are probably covering now just in time to get decapitated.

q99x2's picture

The LA zoo has openings to clean out the rhino pens but hedge fund managers probably won't qualify. That's ok though because there are not that many bums in front of the Los Feliz 7-11--yet.

Zola's picture

As QE positioning is the only driver of performance in this market, the ones outperforming are either very smart or very connected... A study is probably in order.

Tombstone's picture

Help is on the way.  A few years after going off the gold standard, the markets went big time bear in 1974.  The great crash occured in 1987 and in 2000 the tech bubble bursting party took place.  Every 13 years something crazy has occured.  Sure, we sometimes experienced bad times inbetween those cycles.  But I wonder if 2013 will bring us some unexpected event that will blast the markets apart.  Not many would expect it with Uncle Benny buying the markets into forever.

DeadFred's picture

Some might expect it just because Ben is buying the market into eternity. The only valid, non criminal reason I can see for this latest QE is if Ben knows what's coming and if trying to buffer the blow. The criminal-cronyism reasons are still the odds on favorites though.

DavosSherman's picture

When the rest of these fucking morons wake up and have their Stamos Moment like Gross & Dalio they'll get up to speed with the rest of us who have doubled their money 3 fucking time over the last decade.

Sterling Stamos Moments

When you read stuff like this it becomes apparent just how lax money makes people.  You can see how  Pete Stamos the CEO of Sterling Samos Capital Management was running money for the Wilpon family (NYC real estate developer that owns the NY Mets) and he took $40,000,000.00 ($40 million) out of Madoff’s Ponzi scheme when he smelled a rat and dunked it into Sam Israel’s Ponzi scheme a hedge fund called Boyou Management.

Look at this chart and ask yourself, “Why would large institutions start buying gold now?”  Stamos isn’t a moron, he smelled a rat at Bayou too and redeemed his client’s money before others lost theirs.  While Bill Gross and Dalio are late to the gold party, like Stamos, they aren’t morons either.  Admittedly they smell a rat.  A currency rat.  A Ponzi scheme that’ll make Madoff and Israel look like small time chumps.

Cosimo de Medici's picture

A good deal of the underperformance is due to liquidity constraints.  Managing $10 million is easy, $10 billion not so easy anymore.  It costs a lot to put on a position, then a lot to exit it (you move the market).  Put on any sizeable position in a less liquid issue, and somebody can run your stops.  Get in a popular short, and see the cost of borrow skyrocket, then get it called.  Even FX isn't the stomping ground it once was.  There are sharp algo-driven moves on news or rumors, and there's the SNB, who on occasion tries to neutralize its euro position.  And where's Bank Negara today?  They used to be everybody's "bitch".

Gold and silver are simply too small if one is trading size, which is why you see 2% moves on minimal volume.  How about bonds?  There's not a whole lot of float anymore, and when there is anything available, Bernanke buys it.  Lack of liquidity and central bank shananigans are why so many funds are returning money.

Mutual funds are outperforming simply because they are by nature long, and they can then just surf on Bernanke's coattails.  Eventually, for lack of an alternative, everybody just ends up in APPL.  If this continues, HFs will drop by the wayside, and those who are left wll try to sell themselves on negative correlation, which is a nice way of saying "we lost when the mutual funds gained".

DeadFred's picture

Isn't being negative where the 'hedge' part of their name came from? If so when did being an AAPL momo become hedging?

JR's picture

The hedge fund story moves on while the U.S. taxpayers certainly outperform in sending their bucks to Washington; not so with multinationals. Their bucks are performing in Bermuda, Grand Cayman, and elsewhere to dodge U.S. taxes. Headlined in the SF Chronicle yesterday are the grime facts:

“U.S. multinationals have an estimated $1.7 Trillion parked overseas, amounting to 60 percent of their cash,” according to a Senate subcommittee.

The U.S. corporate tax rate of 35 percent may be the world’s highest “but most multinationals pay far lower rates by using tax-avoidance strategies. Corporate taxes have plummeted as a share of federal revenue from a high of 32.1 percent in 1952 to less than 9 percent now.”

Writes the Chronicle: “During that period, payroll taxes have made up a growing share of federal revenue, increasing from less than 10 percent of revenue in 1952 to 40 percent now, while individual income taxes have remained constant at about 42 percent of federal revenue.”

A report to the committee showed:

Microsoft employed offshore entities in Puerto Rico, Bermuda and Ireland to sell its patents, licenses and other intellectual property developed in the United States to its own overseas subsidiaries at beneficial prices that help the company avoid U.S. taxes, the report said.

Last year, 47 percent of Microsoft's U.S. sales were shifted to Puerto Rico under this arrangement, (Sen. Carl) Levin said, allowing the company to avoid U.S. taxes on "47 cents of each dollar of sales revenue it receives from selling its own products right here in this country."

The report showed that many Silicon Valley giants hold most of their cash overseas, according to financial filings this year: Hewlett-Packard (100 percent), Cisco (89 percent), eBay (88 percent). 

Read more:

According to the Center on Budget and Policy Priorities on February 14, 2012, the average United States Corporate Tax Rate (2000-2005) was 13.4%.



LarryDavis's picture

A while back I read a few relatively thoughtful books and papers on how many markets tend to behave randomly (with a near term memory) which discouraged me from trading except in instances where I was very certain of what was going to happen (VIX at 12 Gold at 1200 S&P at 1460). The math behind the exposition was relatively accelerated but because I have two Ivy League degrees I'm fucking nice with math (and with pussy). Not sure if that is true anymore (random markets not my math/dick game) but if only 8% of funds are outperforming markets that implies they are defintely not behaving randomly (central planning) and almost certainly engineered. Someone better at math than myself (If there even is anyone) should compare pre 2008 randomness and more recent market behavior.

OC Money Man's picture

Duhhhhhhhhhhhh  Hedge funds by definition should be under perfoming bull markets.  That's why they are called hedge funds. 

Tyler Durden's picture

If you were a textbook, you would be 100% correct. As it stands, you are dead wrong for two reasons.

1) The Fed: Bernanke has, in his implicit words, removed all risk. So nobody has an excuse to underperform markets.

2) Reality: if you are an LP who has held their cash in a hedge fund that has underperformed the market for a period of time, and paid 2 and 20 for the privilege, you will pull out, especially now that redemption notices are down to 1 month horizons (see: Sonterra Capital for the most reason example of a fund that only modestly underperformed the market, and how quickly it got redeemed to death). Is it fair? No. It is, however, reality.

syntaxterror's picture

With the best government that money can buy, it sounds like it's about time for a BAILOUT for the hedge fund elite.

babylon15's picture

NIRP = hedge funds lose.  In fact, everybody loses.

Grand Supercycle's picture


Due to recent central bank intervention and short covering spikes, all these daily charts are extremely overextended & a significant correction is expected very soon: