Average Hedge Fund Returns A Tiny 6% Through October: Underperforms S&P And Mutual Funds By 75%

Tyler Durden's picture

Collecting 2 and 20 in a world where "alpha-creation" through insider trading (thank you 72 Cummings Point Road for ending that party) is now history will be even more difficult after the current year is over when LPs get their year end performance reports and find out that for the fifth year in a row they have underperformed not only the S&P (by a whopping 75%) but the average plain vanilla mutual fund, which happens to collect a fraction of the fees hedge funds charge just to enjoy the privilege of engaging in pissing matches on CNBC with other hedge fund billionaires.

As the chart below shows, through October 31, the average hedge fund has returned a paltry 6%, 75% below the return of the S&P 500 and the average mutual fund. And while the traditional retort: "hedge funds aren't supposed to outperform the market but to hedge downside risk" is always at the ready, the retort to that retort is that as long as Mr. Yellen is Chief Risk Officer for the S&P, and the Federal Reserve is engaged in QE and otherwise generating a "wealth effect", which according to many will be in perpetuity or until the Fed finally and mercifully is abolished, the purpose behind the existence of hedge funds is simply no longer there as the Fed will never again voluntarily allow the kind of market drop that would make the existence of hedge funds meaningful.

Of course, if and when the Fed loses control, not even the best hedged fund will do much to offset the ensuing cataclysm.

Some other observations from Goldman:

  • The typical hedge fund generated a 2013 YTD return of 6% through October 31, compared with 25% gains for both the S&P 500 and the average large-cap core mutual fund. At mid-year 2013 the average hedge fund had returned 4%, suggesting second-half gains of 2% while the S&P 500 rose nearly 5%.
  • The distribution of YTD performance suggests that 20% of hedge funds have generated absolute losses. The standard deviation of YTD hedge fund returns is wide, at 11 percentage points. Fewer than 5% of hedge funds have outperformed the S&P 500 or the average large-cap core mutual fund YTD.
  • Equity long/short funds have posted slightly better returns than the average across all funds, at 10%. Many of the poorest performers YTD are macro funds, which generated an average YTD return of -4%.
  • Stock pickers have received a boost from their long books, as the most important long positions have outperformed the S&P 500 by nearly 500 bp so far in 2013. Our Hedge Fund VIP basket has returned 30% YTD.
  • However, many widely-held short positions continue to outperform, offsetting the strong performance of popular longs and hampering overall hedge fund returns. The 50 stocks over $1 billion market cap with the highest short interest as a percentage of market cap have returned an average of 34% YTD. More than half of the 50 key short positions have outperformed the S&P 500 YTD, and five have returned over 100%

Precisely as we forecast they would 14 months ago.

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Leonardo Fibonacci2's picture

How are those shorts working out for Einhorn re: GMCR?

alphamentalist's picture

exactly. there are no responsible hedge strategies that will work in this environment. thank bernanke for that.


Don't invest in paper anything, hard assets only going forward.

knukles's picture

Years ago I had to deal with the prospect of this "new and innovative asset class" Hedge Funds.  Which I contended were neither new, innovative nor an asset class.  Leverage has been around forever as have been paired trades (to wit pairing of silver and gold during the time of Sir Issac Newton at the King's Treasury, or even mercury versus gold/silver) so to simply go long or short on leverage does not a New Asset class make.
But, deaf ears and all that shit.
Then, about 15 years ago about 15,000 of my past ex-closest friends (ex-bond salesmen) who could add up 2+20 lickety split decided to become, ta dah!, Hedgies.
So, rue not the demise of the managers nor the impairment of the investors, for Bernie Made-off with their money just like the rest of 'em, with few notable exceptions like Ray Dalio (good stuff)...
And what with the landmines being strewn about with respect to future inflation (you ain't seen nothin' yet, kids) the holding of real assets will be the last savior of your sanity and food consumption.
Fuck financial engineering and salespeople



Thanks Knuckles I/we needed that.

Son of Loki's picture

Hedge Fund Managers are doing well. Clients....mmm...not so much.

AGoldhamster's picture

Dead wrong - hard assets will be destroyed rest of the year - and into Q1 2014.

Derf Scratch's picture

Well at least there's still about 25 trading days left in the year, time to pile into some triple-levered long ETF's... woo hoo! 

I am Jobe's picture

Means Turbo Tax Timmy has work to do by offering  blow jobs and anal sex to ensure Hedge Funds survive

knukles's picture

He's a fan of Caligula, too?

knukles's picture

He's a fan of Caligula, too?

Crash Overide's picture

"Fund Returns A Tiny 6% Through October: Underperforms S&P And Mutual Funds By 75%"


Yeah but it's all fake paper money.

ebworthen's picture

The relentless FED fueled ramp in equities has and will be generating some nice tax revenues for Treasury.

Problem being if they ever stop it will mean some big deductions in taxes and revenue when the market crashes.

More drug addict behavior from Washington and Wall Street; real people in the back seat along for Mr. Toad's Wild Ride.

The Heart's picture

Yeah, in this more than awesome reporting, and all these fine graphics, how does one really truly KNOW all this is real?

Here is something more significant in the sense of reality.:.


Choke the evil snake and kill it.

Pretty simple if you want to protect your families from the Cobras deadly night time strike.:.

In the realm of spirituality, THIS is a greater move from a mass of mankind, than all that these babylonians do on a plane where in the final days...every bit of karma is being tabulated as fast as one breaths. In these times of multi-dimensional changes, all manor of possibilities and the doors of manifestations open.

(A real pretty sad fact is.:.there never really was any real fair balanced news or real truthful information in the American media propaganda mind-kontrol TV-drug system ever really at all.:.A real truth seeker in the USA has to go to the foreign media to get real truth to guide the every day decisions and real actions now)


Fight-Club's picture

I am willing to partner with a couple of hedge funds to collectively stand and bust the Comex gold this December. 
There is a measly $733 million in dealer inventory and only another $8.4 billion in customer inventory in the vaults.
There is already very high December OI, with only 3 days till first notice. 6,000 contracts standing would suffice to wipe out the dealer inventory.
Of course, the Comex wont really bust, settling in cash instead, but a perceived run on the Comex would suffice.

With physical so tight, thin markets in late December, the media attention a run on Comex gold would gain,
plus the debt ceiling and likely European debt crisis in January, there will be more than enough catalysts to gain 10%, even 15% in 3 to 10 weeks. 

JP Morgan is reportedly long 70,000 contracts (ted, turd, jessie) so they wont get in the way.  And I will go on record to say that the Chinese are monkey hammering the paper price via HSBC, all the while taking physical delivery.


jballz's picture



2 and 20, bitchez!


but to be fair the long only crowd in this market is the dumbest money on the planet, returns be damned. They will give it all back in a week. 


Wahooo's picture

Buncha control freaks. That never works.

LongMarch's picture

"Of course, if and when the Fed loses control, not even the best hedged fund will do much to offset the ensuing cataclysm."

Waiting and still waiting. Been a long five years now.

dunce's picture

In the past hedge funds could analyze markets better than the average investor and do better at their expense. now fundamentals and technicals are minor  matters and the market is politically administered leaving political corruption and HFT as the path to profit.

Bobbyrib's picture

You would think that when the market crashes, whatever hedges they have will either lessen the pain compared to owning an ETF market index fund, or that they will actually gain from the market finally collapsing.