88% Of Hedge Funds, 65% Of Mutual Funds Underperform Market In 2012

Tyler Durden's picture

2012 is a year most asset managers would like to forget. With the S&P returning 16% and Russell 2000 up 16.3%, on nothing but multiple expansion in a world where risk has been eliminated despite persistently declining revenues and cash flows, a whopping 88% of hedge funds, as well as some 65% of large-cap core, 80% of large cap value, and 67% of small-cap mutual funds underperformed the market, according to Goldman's David Kostin. The ongoing absolute outperformance of mutual funds over their 2 and 20 fee sucking hedge fund peers is notable, as this is the second or perhaps even third year in a row it has happened. And while the usual excuse that hedge funds are not supposed to beat the market but a benchmark, and generally protect capital from downside risk is valid, it is irrelevant if any downside risk (see ongoing rout in VIX and net position in the VIX futures COT update) is now actively managed by central banks both directly and indirectly, their HF LPs no longer see the world in that way. In fact as Bloomberg Market's February issue summarizes, some 635 hedge funds closed in 2012, 8.5% than a year earlier, despite a far stronger year for the general indices. The reason: LPs and MPs have simply had enough of holding on to underperformers and get swept up in the momentum of performance chasing, and the result is redemption requests into funds who may have had a positive benchmark year, but underperform relative to the S&P for two or more years, which nowadays is the vast majority of funds.

Yet it is not fair to say that all hedge fund strategies have failed: the clear winner among them? Mortgages, driven by none other than the worst kept secret of 2012 - the arrival of QE3, and the $40 billion a month monetization in MBS. While at least QE3 and 4 once and for all sealed any debate over whether there is economic improvement in the US (there isn't, hence the Fed's monthly injection of $85 billion in flow), it was Pimco who was the beacon of what was to come as Zero Hedge readers were made well aware back in February with "Pimco Borrows A Record $88 Billion To Bet On Fed's Upcoming MBS Monetization." Anyone who piggy backed generated the highest Bernanke-assisted Alpha there was to capture in the past year.

Some other facts from Bloomberg Markets:

  • Three of the top five funds invested in mortgage securities and two of them are run by the same company. Betting on mortgage securities outpaced every other strategy, with an average return of 20.2%, against an industry average of just 1.3%.
  • Two of the top 10 funds are based in the UK.
  • While Tiger Management Julian Robertson's "Tiger cub" funds dominated last year's top echelon (including Tiger Global fund at number 1), only one cracked the top 20 this year.
  • Poor returns forced an estimated 635 hedge funds to close in the first nine months of 2012, 8.5% more than a year earlier. Even some big name managers threw in the towel.

While the bulk of hedge funds disappointed, the following were the Top 20 best performing hedge funds according to Bloomberg:

A quick video summarizing all of the above for the time-pressed:


There was the usual court intrigue involving the bad boys of the hedge fund world, fawned upon by what few investors are left, including David Einhorn, Dan Loeb, JANA Partners, Omega Advisors, Citadel (aka the NY Fed's right hand fund in times of need), and Och-Ziff, whose fares were best summarized by Reuters in the following piece.

Yet the overall theme is that it is becoming increasingly clear that the fundamental premise behind hedge funds is slowly but surely being eliminated by the central banks, who are doing all they can to remove all downside risk, a strategy that will inevitably blow up, yet which will mean that in the meantime, everyone will be forced to chase upside strategies, and with retail investors long gone, instead having handed over investment privileges to their deposit-holding banks who daytrade on their behalf (sometimes with JPM CIO consequences), very soon the only trade on the table will be one, and any hedges applied to it will merely serve to accelerate one's inbound redemption notices.

In other words, after destroying proper capital allocation, Ben Bernanke is also wreaking havoc with the fundamental premises of investing.

Goldman's David Kostin explains the return picture from his firm's perspective, and presents the firm's client view on why mutual funds have underperformed so severely:

2012 was a strong year for stock returns but a poor year for managers: Nearly two-thirds of US equity mutual funds lagged their benchmarks. Our analysis of $1.3 trillion in US equity mutual fund assets reveals that 65% of large-cap core, 51% of large-cap growth, 80% of large-cap value, and 67% of small-cap mutual funds underperformed their respective benchmarks, S&P 500 (16.0%), Russell 1000 Growth (15.3%), Russell 1000 Value (17.5%), and Russell 2000 (16.3%). See Exhibits 1 and 2.

Hedge funds also underperformed. 88% of hedge funds were lagging the S&P 500 as of December 21st. With one week remaining in 2012, the typical hedge fund was up 8.1%, with a standard deviation of 10 pp. Two reasons mutual funds lagged: Sector rotation and stock selection. Violent sector rotations proved challenging to navigate as evidenced by mutual fund sector tilts and securities holdings patterns during 2012.

S&P 500 transitioned through three distinct performance phases in 2012 (see Exhibit 3). The market posted a historically anomalous 1Q return and had surged 13% by April 2nd. Rising Europe risk then sparked a 10% decline during next two months. Finally, central bank statements and policy in both the US and Europe laid the foundation for a 13% rise between June 1st and year-end, despite short-lived weakness following the US election.

Below these index gyrations, sector performance showed considerable differentiation. Financials and Information Technology had each rallied 23% through April 2nd, exceeding beta implied returns, and collectively accounted for more than 50% of S&P 500 index gains. However, managers chasing momentum premised in increased regulatory clarity / firming housing data for Financials and stronger spending patterns for Info Tech then faced 15% and 13% declines through June 1st as risk sentiment fell precipitously. Ultimately, willingness to maintain a Financials overweight throughout the year afforded considerable relative returns (+13 pp over the index), while those managers maintaining overweight exposure to Tech past June generated considerable performance drag (-6 pp of relative return).

Generally, across S&P 500’s three performance phases in 2012, only Consumer Discretionary consistently outpaced the index. The other nine S&P 500 sectors shifted between over-and-underperformance.

Holdings data suggest large-cap core managers had mixed success in managing these sector rotations. Starting 2012 with an aggregate underweight position in Financials, many missed concentrated gains in 1Q. Boosting exposure by April was penalized by below-market returns through June. However, managers continued to add Financials exposure in the second half, enhancing performance. Financials massively outperformed the S&P 500 from June 1st onward (+24% vs. +13% for the index).

Mutual fund managers proved more capable of navigating Information Technology. Market weight exposure meant most funds failed to capture 1Q strength. Yet, shifts to a substantial Info Tech underweight position from 2Q onward (2nd largest behind Utilities by year-end) proved prescient given that the sector lagged during this time (-5% vs. S&P 500 +3%).

Managers maintained a consistently strong overweight position in Consumer Discretionary throughout the year. Funds benefitted from this allocation given the sector’s +790 bp of outperformance in 2012.

In terms of cyclical vs. defensive positioning, managers remained consistently underweight Telecom and Utilities throughout 2012. Although funds missed the 2Q flight to safety, the tilt away from defensives ultimately proved advantageous as Telecom only slightly outperformed the index in 2012 (+2 pp) while Utilities lagged substantially (-15 pp). In contrast, a steady move from a market weight to a substantial overweight in Consumer Staples by year-end proved misguided, as market returns in 1H were followed by 4 pp of underperformance in 2H. A year-long overweight in Health Care worked well after 1Q, and now represents large-cap core managers’ strongest overweight position.

More cyclically, slight overweight positions in Materials and Industrials both generated mild drag across the year as a whole, with the sectors each lagging the index by 1 pp. Finally, while managers benefited materially from an Energy underweight in 1H (-12 pp of relative underperformance vs. the index), further decreases in exposure in 2H yielded no advantage as Energy modestly outperformed.

Stock positions also mattered. In 2012 stable, beneficial overweights for large-cap core managers included NWSA, AMGN, BK, EBAY and GILD (in order of importance) while beneficial underweights included XOM, INTC, IBM, MCD and NEM. Alternatively, major overweights generating headwinds to performance included CHK, HPQ, DVN, MSFT and APOL, while underweights creating drag on a full year basis included BAC, AAPL, CMCSA, CRM, and AMZN. On net, our analysis suggests that timing sector and single-name rotations proved difficult given the market’s macro drivers.

* * *

Finally, for those curious how they placed, or how that fund next door did, here is the final HSBC report of 2012. On to 2013.

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IMA5U's picture

Misery loves company

DoChenRollingBearing's picture

I am glad that I do not manage other peoples' money.  I would have underperformed in 2012.  However, I am taking a longer view.  THEIR 2012 performance was fragile, mine was antifragile.  We'll see who wins by 2015.

Harlequin001's picture

and all those funds that did outperform the market were a complete fluke.

How can you measure performance against anything like the S&P and retain any credibility whatsoever when it is as manipulated as this? If you do not sit on the board of the Fed or the major banks then you are just blind lucky, nothing more. Hedge funds are there for a reason, and that reason has been entirely undermined by the manipulators. That's not a good enough reason to crow about under or outperforming something that exists for idiots and is clearly now entirely false, and with no place else to go.

All these markets and funds that you infer are better value than hedge funds will ultimately fail, eventually. That does not make their short term outperformance any better or more attractive.

It's still a vehicle for idiots, and you're still going to lose your money.

CPL's picture

240 enter, nobody leaves.


That's the hedge fund business now.  Read the headline and what it should say is 9 out of 10 hedge fund managers got paid to be raped by the one.  

Runs about the same as a well known stat that used to be true 9 of 10 traders.  Creepy huh?

Half_A_Billion_Hollow_Points's picture

bitcoin moved from 4 to 13 in 2012.  People are moving into this new, honest, banking system quite rapidly.

CPL's picture

As long as the power stays on...like the modern system that seems to be failing horribly in most of the developing world due to rolling black outs, complete grid outages...well.  If your money is in a computer, it's only there if it the whole system stays on.


Might want to hedge some of the bitcoins for silver coin.

ball-and-chain's picture

There's no way to "win" in this market.

The whole kit and ka-boodle is dominated by fraud.

Without insder information, you're screwed.

If you don't know the sucker at the card table, it's usually you.


Snoopy the Economist's picture

Not true. Learn to buy trends and make money.

francis_sawyer's picture

 Yhhk oc Doln`w 50 Nhe ~o Cvgn`w => A`l 6=05


How can anyone argue with that?

Translation: "Our joobux did better than your joobux"

StandardDeviant's picture

Junked you for the puerile "joobux" thing.  Envy and scapegoating are not pretty.

But seriously, ZH, wtf is with this Scribd thing?  Why does it exist?  What does it add to the world?  Only mangled text, broken font handling, and annoyance, as far as I can tell.

If you really must continue to use the cursed thing (due to contractual obligations, blackmail, lost bets, close relatives involved with the company, etc.) please consider adding a link to a plain old PDF, so that people who actually wish to read the document can do so.  Thanks in advance.

francis_sawyer's picture




Adjective: Childishly silly & trivial

If you think it is "childishly silly & trivial" to identify a debt based monetary system [which is the standard operating procedure used by central banks worldwide, which, in turn, are banking "franchise" operations which overwhelmingly benefit only a small clique of oligarchial families, who are, in fact, jews], & whereby the francises themselves [the banks, & banking systems ~ mostly run by jews] are allowed to 'print money' [for themselves], as 'joobux'... Then I beg to hear a more mature & fact laden definition...


"Envy & scapegoating is not pretty"   Neither is stealing wealth (as well as hope, freedom, & incentive from the masses)... More specifically ~ on the subject of 'scapegoating'... I can ASSURE you that it was not francis_sawyer who brought this system in to being... Unfortunately ~ there still remain a few like YOURSELF who would rather point the finger at me though...

But you're probably right... I keep forgetting that it's actually the 'Zionists', 'Ashkenazis', 'Luciferians', 'Trekkies', 'Birders', & 'Zumba Enthusiasts' that are most responsible...

CPL's picture

Sorry to hear you are on a smart herd management and communications device.  You can just block the domain.


If the iPhone, iPad, whatever.  Can't help you, sorry you bought wrong...like every other apple user.  God you all get suckered in every, single, time.  Fuck it's funny.


If you are using a pos 60 buck Android tablet running 2 gigs and a 1 ghz cpu from a Chinese junk shop like this one from the guys that make the Kobo/Kindle.  Kross is a maker of fine chinese junk that is very hackable.


  1. Install Android Firefox with Adblock and block the offending material OR
  2. Install Ubuntu 
  • Root the device
  • Install Ubuntu 10.04 on a simm card and boot.  
  • Full OS on a cheap POS with full capabilites to block what you want to.

Runs a little faster than Android 4.0 if you want to stick with it.  Or if you want to run Windows XP tablet edition.  Again install the OS on a simm card and boot from root and load XP and hook up a usb keyboard or attach a USB replicators and hang as much crap off of it as you want.  There are many options you can choose from.  The offering of Scribd isn't the problem (unless literacy is a challenge).  

The platform you are using is obviously junk and you don't know how to manage your shit.  I don't blame a car crash on the CD player, neither should you.

Mongo's picture

John Paulson's return is the new normal

Salon's picture

I can underperform the market all on my own. I dont need to pay someone to do it for me.

GMadScientist's picture

And yet, every fucking April...I pay just the same.

DoChenRollingBearing's picture

Yeah, I hear you.  Every fucking April...

GMadScientist's picture

They do let me keep more than the average Joe when I win at the casino though!

Catullus's picture

If you're smart, you'll collar your long equity positions into the debt ceiling discussion. But you don't need a hedge fund to put a collar on, you just have to know what you're doing.

GMadScientist's picture

If you're smart, you'll stay out the bay n'at dingy durin'a f'in' Noreastah'!

GMadScientist's picture

"Poor returns forced an estimated 635 hedge funds to close"


Aurora Ex Machina's picture

Smart comment. Flows into EFTs and for the big boys, Family Offices.



+1, since your quotation at the start prevents the button from working ;)

magpie's picture

OT puzzling, in reference to the WH wanting to go over the fiscal cliff and the Fed's sudden 'No more QE' (haha) announcement: Is the Federal Reserve really obliged to accept / monetize that constitutionally precarious platinum trinket and does it even want to ?

nmewn's picture

On the platinum coin angle, its pretty funny watching the contortions of Krugman on the subject...

"First, as a legal matter the Federal government can’t just print money to pay its bills, with one peculiar exception. Instead, money has to be created by the Federal Reserve, which then puts it into circulation by buying Federal debt. You may say that this is an artificial distinction, because the Fed is effectively part of the government; but legally, the distinction matters, and the debt bought by the Fed counts against the debt ceiling."

Hold that thought Heir Krugman...

"The peculiar exception is that clause allowing the Treasury to mint platinum coins in any denomination it chooses. Of course this was intended as a way to issue commemorative coins and stuff, not as a fiscal measure; but at least as I understand it, the letter of the law would allow Treasury to stamp out a platinum coin, say it’s worth a trillion dollars, and deposit it at the Fed — thereby avoiding the need to issue debt."

Still with me on the constitutional legal concepts of fiat money, debt and thereby taxation without representation Professor? Good.

"In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, >>>allowing Congress<<< to tell the president to spend money then tell him that >>>he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.<<<


Like what new gimmick Paulie?

Declaring Obama a dictator with no checks and balances to restrain him?

magpie's picture

Is the coin debt or isn't it; and if you don't have budgets anymore debt ceilings are the best you are going to get ?

nmewn's picture

The coin would be encumbered debt & worth in fiat what is stamped on it, the very same thing as printing a paper trillion dollar bond, so there's not much point to it. Its real value would remain just as it is.

Its really the reverse of reality when you think about it and a mark of desperation. For example, the silver eagle says one fiat dollar while its value is around thirty dollars last I checked.

As far as the budget process, the Senate is in technical violation of the constitution for not passing a budget, preferring to not have an open and honest debate on where & how much of the peoples tax money goes and for what.

So the people can see and discuss among themselves and add input. The House by the way, has sent a budget over there every year since 2011.

The debt ceiling falls under the same guidelines. Congress (House & Senate) taxes and apportions, the Executive (the president) can ONLY spend what congress allows him to spend or...we are indeed a banana republic.

nmewn's picture

I'm always open to factual correction ;-)

DoChenRollingBearing's picture

@ nmewn

I THINK that platinum has been considered because (I read somewhere, FWTW) gold, silver and copper are in the Constitution or otherwise are prohibited from being used such schemes.

I would not at all be corrected,as I too would like to learn more of this scam and its legailities...

nmewn's picture

I believe that platinum is being considered for this debt ruse "instrument" as Heir Krugman (or someone else already said) because it is not constitutionally recognized as money.

It would be a commemorative coin that only Bernanke would be stupid enough to buy at a trillion dollars a pop from a morally & ethically bankrupt government...lol.

knukles's picture

I think Dr. UKnoWho is just plain full of shit.
Ignore him.

Go Tribe's picture

I haven't been following this Trillion-Dollar Coin thing. You mean Bernanke would essentially just be buying the latest Franklin Mint collection?

CheapBastard's picture

I dumped all my mutual funds long ago when Vanguard Precious Metals Fund lost over 30% when the market crashed by not seeing what was about to happen despite multiple warnings by people on and off Wall Street and they totally missed the gold rally. Most of these funds seem to be managed by MBAs that spedn more time at lunch and on the squash court then careful analyzing of companies and their management.

NoDebt's picture

Paying a hedge fund 10 year Treasury rates to lose your money for you.  Genius!

Old expression that Alpha eventually just becomes Beta.

daxtonbrown's picture

There's one clear solution to the malaise in hedge funds. Buy more Apple stock!

Although I must say the Facebook PE looks tempting for similar long term returns.

Seasmoke's picture

Time to bring out the upside down chart reading monkeys

Manthong's picture

I know the lady who posted that HSBC report.

She works in the investor relations department and her name is Swan.. Ebony Swan.

AlaricBalth's picture

I was not aware that Scores had an investor relations department. I do know that there is a quantifiable amount of "tail risk" there.

Clowns on Acid's picture

Does she have a fat tailed sister named "Dive"?

JR's picture

Post the ’08 Crisis the rhetoric remains the same – stock trading is still falling.

Even though American stocks have doubled in price in the last three years, investors and traders large and small keep giving the market the cold shoulder.” – Nathaniel Popper, NY Times, May 6, 2012

TOP STORIES 2012: Trading Volume Continues to Fall; No End In Sight

Traders Magazine Online News, January 2, 2013

Gregg Wirth

The dramatic drop in the trading volume of U.S. stocks continued to be one of the biggest stories of the year, notable not only for what it meant in its own right, but also for the corresponding impact it had on virtually all other major stories of the year. Layoffs, crushed brokerage commissions and shuttered trading desks all had their roots in the decline of trading volume that has gripped the industry over the past three years.

Volume has been dropping consistently since the onset of the financial crisis. Worse yet, it shows no signs of improvement. The decline is deeper and longer-lasting than the market experienced following the dotcom crash in 2000 and the overall market crash in 1987.

To illustrate this downward slope, one only has to isolate any given month. If you look at September, for example, the average daily volume in 2012 was about 6.5 billion shares traded per day, according to data from Nasdaq OMX. That is down more than 42 percent from the average daily volume in September 2008 of 11.3 billion shares. Average daily volume in September has dropped steadily in three of the past four years, and this year’s total is the lowest it’s been since 2008.

And it’s not just a September phenomenon. You’d have to track back to October 2011 to find a single month that posted a better average daily volume than the previous year. That is a slow grind, a death by a thousand cuts, each representing another slow day of trading.

Two negative trends among asset managers have had a strong hand in driving volume lower—allocation and turnover. Simply put, portfolio managers across the board are buying fewer stocks and not trading out of much of what they do own.

Want one example? Ford Motor Co., which manages about $60 billion in defined benefit plan assets, allocates a combined 42 percent of its portfolio to U.S. and foreign stocks. In a filing earlier this year, it said it would cut that figure to 30 percent over the next few years. That move alone takes an additional $7.2 billion out of the equities market. Also, new rules from regulators sped up how loss recognition is recorded for accounting purposes, and this has made many funds unwilling to endure the stock market’s ups and downs.

Turnover, the trading of stocks within a portfolio, also has declined along with the volume slowdown, greatly contributing to it. Turnover peaked in 2009 and has been declining ever since.

Whatever the cause of the volume drop, of course, there is one ultimate victim—brokerage commissions. In its midyear report, Greenwich Associates noted that brokerage commissions have declined dramatically, falling 22 percent since 2009. Greenwich's 2012 U.S. Equities Investors Study, which tracks brokerage commissions paid by U.S. institutions on domestic trades, showed brokerage were paid $10.86 billion between 1Q 2011 and 1Q 2012. That represents a three-year decline from a 2009 peak of $13.95 billion.

So, when will this dismal stretch end? Not in the foreseeable future, said Mark Kuzminskas, director of trading at Robeco Investment Management. “Right now, there is such a tight correlation between stocks and the macroeconomic characteristics of the overall economy—like Central Bank intervention and the slow global economy—that it drags on volume,” Kuzminskas said. He added that additional factors, like the proliferance of exchange-traded funds, also have siphoned off volume from stocks.

If this strong bond can be broken, stocks may see some upswing in the coming year, but there is little sign of that possibility. “Given that, I’d expect next year we will see more of the same as far as volume goes,” he said.


sharky2003's picture

The key is to find a fund that limits downside risk, even at the expense of upside gains IMO. Here's why:

10,000 in both funds:

Fund A loses 25% and then gains 10%... ends up with 8250.

Fund B loses 50% and then gains 20%... ends up with 6000.

Fund A wins, even thought it "underperformed" the market. Fund B would have to gain 100% back just to break even, while fund A onlyhas to gain back 33%. 

paladin's picture

Hedge Funds,  or Mutual Funds

the 20 day and 50 day avarge and the MACD


you do need need the hacks

are you shitting me

MFLTucson's picture

There is no way anyone can make sound investment decisions when you have a corrupt group of people manipulating markets, interest rates, money flow, handing money to banks to short markets to run them up and down and a group of liars and phony’s in charge of the Treasury and the Federal Reserve.   The Federal Reserve must be abolished and this whole criminal circle disband before you will have an environment conducive to investing in anything.

Lost Wages's picture

If you're a mutual fund investor, it's best just to stick with index funds. Paying 10 times more for some "stockpickers" management fee is a fools game these days.

GMadScientist's picture

I'm investing in dartboard manufacturers, I hear they're in an upswing for some reason.


thorgodofthunder's picture

Not a spec of discussion on Herbalife and Ackman. Why the silence?

AynRandFan's picture

Good article.  The perception of zero risk in the macro economy is the biggest danger in the world today.  It's as John Mauldin has said, if you have an unstable financial system, at some point it will fail.  My guess is that a collapse of the financial markets in Japan will be the trigger.

GMadScientist's picture

Japan, China, Zooropa, US...not if, but who.