Ben Bernanke Crushes Hedge Funds: Average Hedgie Underperforming S&P by 65% In 2013

Tyler Durden's picture

Yes, yes, everyone knows hedge funds aren't benchmarked to the S&P - after all they "hedge" for the broader market downside.

Here is the problem: having underperformed the S&P for five years in a row, many LPs are starting to get tired of not only underperforming stocks but paying out 2 and 20 on all the lost upside (and not only due to such leftfield surprises as RICO Stevie).

The bigger problem is that by the time the crash finally comes, there will be no hedges left as the Federal Reserve will have made sure all shorts get crushed as confirmed by the relentless outperformance of the most shorted stocks relative to the market (and why we continue to suggest quarter after quarter that going long the most shorted stocks is the most lucrative "alpha" strategy) as "hedge" funds abandon all hedging in droves and become "long-onlies", a problem further compounded by the fact that when the real crash does come not one hedge fund will be positioned properly and able to generate any alpha.

The biggest problem, at least for the active management community, is that with the global central banks now stock market activists and buying stocks outright, it is they who have eliminated the downside risk and by implication made hedging redundant.

So for all those curious why all real money managers (and not those who spend 18 hours a day on the modern day Yahoo Finance known as Twitter, "trading" with monopoly money while selling $29.95 newsletters) are furious at what Bernanke and company are doing as shown in the most recent Ira Sohn conference, we present the chart below from Goldman which confirms what most have already known: the Federal Reserve has made hedge funds a thing of the past, whose investors are sure to keep underperforming the S&P until the moment when it all goes tumbling down.

Luckily, at that point, bidless market aside, everyone will be able to sell ahead of everyone else, or so the momentum-chasing mantra goes. In the meantime the facts are sobering: the average hedge fund has returned a tiny 5.4% through the week of May 10, a whopping 65% discount to the performance of the S&P, and even the average mutual fund has outperformed the average hedge fund nearly threefold!

Some more from Goldman:

  • The typical hedge fund generated a YTD return of 5% through May 10, compared with 15% gains for both the S&P 500 and the average large-cap core mutual fund (see Exhibit 1). Hedge funds returned an average of 3.5% in 1Q 2013, lagging the S&P 500 by 700 bp. Last year the average fund returned 8% vs. 16% for the S&P 500.
  • The distribution of YTD performance indicates that 13% of hedge funds have generated absolute losses. The standard deviation of YTD hedge fund returns is 6 percentage points and almost half of funds have generated returns between 3 % and 8%. Fewer than 5% of funds have outperformed the S&P 500 or the average large-cap core mutual fund YTD.
  • Despite starting the year with the highest net long exposure since 1Q 2007, strong long performance was not enough to outweigh the drag from popular short positions. Our basket of S&P 500 stocks with the largest dollars of shorts (<GSTHVISP>) has returned 17% YTD, in line with the VIP basket. In addition, 22 of the 50 stocks over $1 billion with the highest short interest as a percentage of market cap returned over 30%, twice the S&P 500 return. The average return of these 50 stocks was also 30%.

As for that key "benefit" from hedge funds - diversification away from single-name holdings - they were only kidding. In fact the average hedge fund is nearly twice more undiversified than the average mutual fund, and just 10 names represent 63% of the average hedge fund's AUM. See AAPL for what happens when said hedge fund hotels fall out of favor.

"Hedge fund returns are highly dependent on the performance of a few key stocks. The typical hedge fund has an average of 63% of its long-equity assets invested in its 10 largest positions compared with 37% for the typical large-cap mutual fund, 16% for a small-cap mutual fund, 18% for the S&P 500 and just 3% for the Russell 2000 Index."

Finally, for those wondering who is selling one share of SPY or GLD for every share bought? Wonder no more: ETFs continue to be the widest used hedging vehicle:

  • Hedge funds appear to use ETFs more as a hedging tool than as a directional investment vehicle, based on our analysis of 13-F and short interest filings. We estimate that hedge funds hold $126 billion in gross exposure to ETFs compared with $1.4 trillion of gross exposure to single-stocks. ETFs represent 3% of long holdings, down from nearly 6% in 1Q 2009 and the lowest since 2Q 2011 levels (Exhibit 22).
  • The $96 billion of short ETF positions accounts for 76% of the hedge fund gross ETF exposure. In contrast, single-stock short positions ($406 billion) represent 29% of hedge fund gross single-stock positions. The most shorted ETFs tend to be index hedges (representing $50 billion of the $96 billion short positions). Commodity-related, bond funds, and Emerging Market ETFs appear to make up the majority of ETFs that hedge funds utilize on the long side (see Exhibit 23).

Source: Goldman

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SheepDog-One's picture

They all gleefully demanded Bernank embark on QE dreams of free they're furious? 

Oh well, fuck them.

And fuck you too Bernank!

aint no fortunate son's picture

this news should be good for 12 SPX points to the upside today

espirit's picture

...and positive for the next BLS release.

vmromk's picture

All hail the mighty Bernank, slayer of hedge funds.

The real fun begins when this FUCKED UP experiment unravels and the almighty Bernanke is living in fear for his miserable life.


NaiLib's picture

By then he has joined the "vitness protection program" together with Krugman and live a realxed life in a rcking chair by a lake fishing.

verum quod lies's picture

I didn't know fishing was popular among tribe members.

SheepDog-One's picture

Throw in a Target earnings miss due to 'good weather'...gee I guess good weather is bad for shopping...and we should raise the roof on record highs for another consecutive day.

Cdad's picture

That's right brother Sheepdog...the hedge fund guys just did not conceive that the most successful traders to date would be the intellectually stunted, shallow...perhaps even retarded SPY momo buyers.  

Falls under the category careful what you ask for.

SheepDog-One's picture

Yep, tried to warn em all way back then that central banksters are villains disguised as saviours.

Ghordius's picture

won't cry even one tear if all hedge funds go back to where they came from - I know that some of them are heroes here, but just remember where the sausage filling pink slime comes from that make a normal fund a "hedge" fund

I'm blaming the new games rules here, not the players (note though that most of them are Masters of the Universe, too)

Bangin7GramRocks's picture

I call major bullshit! Less insider information because of some slight government crackdown= no more 30% returns. Plain and simple. When the government backs off, they will resume cheating and magically become geniuses again. The mafia also earned less after they started wiretapping. Same thing.

LawsofPhysics's picture

Mission accomplished, no one will be allowed to prepare/save/hedge.  Fuck you Ben Bernanke!

LawsofPhysics's picture

Just be sure to be stacking gold, silver, copper, lead, and brass!

horot's picture

"Ben Bernanke Crushes Hedge Funds"


Tell that to John Paulson.

resurger's picture

Why they hate him so much .. lol?

From ABX to Gold, he must be a terrorist.

IamtheREALmario's picture

But let me guess ... Goldman, JP Moron and Moron Stanley all have had 100% winning days in 2013. The hedge funds are some of the biggest customers of the big bank owners of the Fed. So, are the banks stabbing their hedge fund buddies in the back? And who is doing the bank dirty work?

ekm's picture

That's just propaganda. I'ts impossible to have 100% of anything.


Pension funds are major shareholders of big banks os big banks come up idiocies like this.

Imagine what would happen if they said they were only 60% succesful?

ekm's picture

hedge funds are losing due to the lack of suckers, hence forced to delever

Ghordius's picture

Roman Emperor Vespasian called his Financial Knights his "walking piggy banks" (actually in Latin it's sponges)

Jesse of Jesse's Cafe Americain calls the Hedge Funds the destroyers attached to the megabank battleships

the Greek Myth of Chronos the father of the gods was that he used to eat them (until Zeus escaped)

sacrifice is a virtue - sacrificing your minions is... business as usual

ekm's picture

As far as I remember Vespasian was the first one to introduce payment to use public restrooms.


When his son told him that it was stupid to force people to pay for entry into SMELLY places like publis restrooms he answered:


Ghordius's picture

 Pecunia non olet - or, to paraphrase ZH's Tyler Durden: it's fungible

Al Capowned's picture

Dear Hedge Fund's

Want to get even?

Please buy Gold ,Silver and Bitcoin.

Kind Regards

sablya's picture

I doubt that Bridgewater is complaining.  More likely making hay while the sun shines.  And making umbrellas for the rainy days.

NoDebt's picture

Sucks being them.  Like all investment "strategies" (trends, fads, whatever) Alpha eventually just becomes Beta.

EmileLargo's picture

Between 2003 and 2013, I have massively outperformed the S&P but between 2009 (the bottom of the QE fuelled bubble stock market) and 2013, the market has outperformed my portfolio. What matters is where long term performance is - not short term moves. This market will collapse under its own weight - some 80 percent of fund managers are BULLISH on STOCKS. If that is not NUTS, I don't know what is. And if the data that comes out is bad the stocks go up even more - because it means the Feds PRINT even more! Ridiculous.

Call me a masochist but I am short the stock market. I know this will be painful for a while but I intend to cash in MASSIVE profits when this thing collapses - which isn't far off.  

Bearwagon's picture

Yeah, prepare yourself to be Dieselboomed immediately after said collapse ...

More_sellers_than_buyers's picture

What are you talking about? The smartest guys in the room are broke.  You will be too. Original thought and ideas are dead.  Hedgies and banks do not want smart people running money.  They want math majors from MIT that dont know shit about economics. It is a rigged game.  Put your talents toward something productive before you wind up broke.


EmileLargo's picture

Productive? and get paid $20,000 a year? When in Rome.................

babylon15's picture

I'd like to point out that Berkshire Hathaway is also on its 5th year of underperforming the S&P 500.  The irony is that Warren Buffett made a bet with a fund-of-funds manager 5 years ago that hedge funds wouldn't outperform the S&P 500 over the next 10 years.  Looks like Warren Buffett can't either!

EmileLargo's picture

Buffett is over-rated. The only reason he is so rich is because: (a) he is very old; (b) never got out of the game; and (c) never gave any money away.

fonzannoon's picture

the irony is that is we had a 10% correction and then stabilized somehow these hedge funds would unload all their hedges and go massively long in hopes of finally playing catch up. 

Downtoolong's picture

I can imagine eventually getting to the point where people don’t even try to figure out what things are really worth anymore. We will just wake up each morning and look to the Fed to tell us the calculated price of every stock, bond, and investment in the world. Then we can all go play baseball or something. 

“One vast and ecumenical holding company,
For whom all men will work to serve a common profit,
In which all men will hold a share of stock,
All necessities provided,
All anxieties tranquilized,
All boredom amused”

Network, 1976

orangegeek's picture

But management fees are up 1200%.



buzzsaw99's picture

Gold massively underperforming in 2013 too.

pragmatic hobo's picture

zero-hedge is the only way to go ...

WTFUD's picture

" you gotta be trusted by the people that you lie too
so that when they turn their backs on you
you'll get the chance to put the knife in"

Pink Floyd " Animals; Pigs on the Wing " a must listen to and suitably Apt.

Catullus's picture

They're using ETFs to hedge? Damn. They deserve to underperform.

resurger's picture

Tyler and ZH i need to understand this:

So the Fed's buy paper from the treasury and the TBTF, now the TBTF repo that papers and get's cash and place it in the federal reserve as excess deposit right?!

Now from this article:

Is the REPO rate for 10years is capped at -3%? Just need to make this clear, i.e they give the bonds as collateral for cash and they pay -3%? And ofc they receive the IOER

appreicate the help thnx

venturen's picture

There is no hedge against a 100% articifical bull market to the moon. Just lever 100 x 1 bull market! No need for hedging....FED will pump any move downward back up...we need montary inflation. Record markets all around!