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Career Risk Panic: Only 11% Of Hedge Funds Are Outperforming The S&P In 2012

Tyler Durden's picture


The S&P500 may be soaring to new 2012 highs, and has its all time highs within short squeeze distance, yet paradoxically this is arguably the worst possible news to the cadre of US hedge fund managers used to beating the market year after year, thus justifying their (increasingly more unsustainable) 2 and 20 fees. The reason: according to just a released report quantifying hedge fund performance so far in 2012, with an average return of 4.6% as of August 3 compared to a 12% return for the S&P, a pathetic 11% of all hedge funds are beating S&P year to date. This is the worst yearly aggregate S&P 500 underperformance by the hedge fund industry in history, and also explains why the smooth sailing in the S&P500 belies the fact that nearly every single hedge fund manager (and at least 89% of all) is currently panicking like never before knowing very well there are only 4 more months left to beat the S&P or face terminal redemption requests. And with $1.2 trillion in gross equity positions, the day of redemption reckoning at the end of the year (and just after September 30 for that matter as well) could be the most painful yet. it also explains why, just like every other quarter in which career risk is at all time highs, HFs are dumping everything not nailed down and buying up AAPL, which as of June 30 was held by an all time high 230 hedge funds (more on that later).

Key HF performance observations from Goldman:

The typical hedge fund generated a 2012 YTD return of 5% through August 3rd compared with a 12% gain for the S&P 500 and a 10% return for the average large-cap core mutual fund (see Exhibit 1). The standard deviation of all hedge fund returns was 6 percentage points so two-thirds of hedge funds have generated YTD returns between -2% and +11%.


Distribution of returns provides more perspective than a single point estimate. Only 11% of hedge funds have generated YTD returns greater than 12%, outperforming the S&P 500, while 10% of funds of returned more than 15%. 79% of funds had positive returns.


Popular long positions have lagged both the index and popular short holdings in 2012. Our Hedge Fund VIP Basket (Bloomberg ticker: <GSTHHVIP>), consisting of 50 stocks that appear most frequently among hedge fund top ten holdings, has returned 9% YTD, lagging the S&P 500. Our Very Important Short Position Basket (<GSTHVISP>) of stocks with the highest total dollar value of short interest has returned 12% through August 3rd, in-line with the index, outperforming the VIP basket by 250 bp. In subsequent weeks, the VIP basket outperformed. Through August 15th, our hedge fund Very Important Position (“HVIP”) basket returned 12.4%, in line with the VISP basket over the same period of time.


Hedge funds reduced risk as the market pulled back in 2Q and their long positions suffered. Hedge fund net long exposure fell to 43% in 2Q 2012 from 49% in 1Q 2012, above the recent low of 36% in 3Q 2011 but well below the 52% high in 1Q 2007. S&P 500 fell 3% in 2Q while the VIP basket returned -7%, likely reflecting both a cause and symptom of fund underperformance and de-risking.


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Mon, 08/20/2012 - 19:14 | Link to Comment TWSceptic
TWSceptic's picture

And what are all of them doing priced in gold?

Mon, 08/20/2012 - 19:22 | Link to Comment Tippoo Sultan
Tippoo Sultan's picture

Two-and-twenty indeed.

And to think that the Fidelity Contrafund, with a total expense ratio of 0.81%, is up, as of today's close, 14.6%, year-to-date.

Mon, 08/20/2012 - 19:35 | Link to Comment AlaricBalth
AlaricBalth's picture

Some of these hedge fund managers will probably shut down and set up a new shop, rather than tough it out and try to get back above the high-water mark mandated in their offering memoranda. A common practice among less scrupulous hedgies.

Mon, 08/20/2012 - 19:56 | Link to Comment ACP
ACP's picture

They simply don't have implicit Fed backing, like all the securties related to the S&P.

I don't see why fund managers don't just invest in the S&P and give the fund a bullshit vacuous name to make it seem like they're actually doing something.

Tue, 08/21/2012 - 05:49 | Link to Comment StychoKiller
StychoKiller's picture

Another ban on short-selling oughta kill'em all off...

Mon, 08/20/2012 - 21:08 | Link to Comment Boston
Boston's picture

Contrafund, the same fund that was down ~50% in 2008?

Tue, 08/21/2012 - 09:16 | Link to Comment Tippoo Sultan
Tippoo Sultan's picture

That's odd: Contra was down 37% in '08, matching the S&P. Obviously, there must be another Contrafund out there -- perhaps one of those "long-only" 2+20 investment vehicles, for which, a decline of 50% would not have been out of the ordinary.

Tue, 08/21/2012 - 08:57 | Link to Comment midtowng
midtowng's picture

Mutual funds doing twice as good as hedge funds?!? Now that's funny!

Mon, 08/20/2012 - 22:53 | Link to Comment philipat
philipat's picture

Why would anyone pay 2/20 to buy AAPL?

Mon, 08/20/2012 - 19:17 | Link to Comment vinu02
vinu02's picture

79% had positive return. means 79% retail investor r screwed up in the process.



Mon, 08/20/2012 - 19:41 | Link to Comment Daily Bail
Daily Bail's picture

Please excuse my language in the headline below, but Eric Holder and Jon Corzine are really starting to piss me off.

New story:

"CME Chairman Provides Absolute Fucking Proof That Jon Corzine Is A Guilty-Ass Motherfucker"


Mon, 08/20/2012 - 20:18 | Link to Comment LMAOLORI
Mon, 08/20/2012 - 19:19 | Link to Comment poor fella
poor fella's picture

Perfect timing on UBS' part to open a quant service offering hedge funds new tools.

How many levels of b.s. are being piled upon each other in this wonderful financial system of ours?


Mon, 08/20/2012 - 19:18 | Link to Comment Meesohaawnee
Meesohaawnee's picture

maybe all the hedgies were playing that long lost art of fundamentals? naah.. cant be.

Mon, 08/20/2012 - 19:21 | Link to Comment gavroche76
gavroche76's picture

Time to buy (or update) robots i guess...

Mon, 08/20/2012 - 19:25 | Link to Comment Robot Traders Mom
Robot Traders Mom's picture

I'm not for sale and neither is my son. I got out of that game.


PS-some really good stories I've linked...Seriously, really good.


Mon, 08/20/2012 - 20:22 | Link to Comment pd45
pd45's picture

Thank you for discovering color.

It's actully interesting to see a site evolve. I'll send some clicks on your way.

Keep up the good work.

Mon, 08/20/2012 - 21:48 | Link to Comment Dr. Engali
Dr. Engali's picture

Hey gruesome... I just checked out your page from my phone. I don't know if the format is the same as it might be on a computer, but if it is might I suggest you add some links to other financial and news sites. It's looking better though.

Mon, 08/20/2012 - 19:20 | Link to Comment francis_sawyer
francis_sawyer's picture

Leonard the monkey bitchez!

Mon, 08/20/2012 - 19:22 | Link to Comment JeremyWS
JeremyWS's picture

Aren't hedged funds expected to be low beta? I.e underperform in the good times but outperform in the bad times (soon) so really this isn't a surprise, they are meant to be lower risk.

Mon, 08/20/2012 - 19:40 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

and people expet their counterparties to be able to balance a checkbook too

but yes, the indices are doing so well y-t-d unhedged [b/c the banksters have amazed everyone by just keeping the checks in the mail], that the hedgies can't keep up "playing safer" (hedged)

but nobody is complaining abt lack of liquidity, altho tyler seems to fear it a LOT... 

tyler would seem to think the market is "waiting to exhale"

hyper-vent-ilation @ in the punch-(bowl)-line?  shotgun!


Mon, 08/20/2012 - 19:46 | Link to Comment lotsoffun
lotsoffun's picture

jeremyws, yup. low correlation.  the ability to make money + in bad markets, when easy markets, it's easy to index and make money.   ergo the name 'hedge' fund.  but that was a long time ago......  probably the end of the 90's.

Mon, 08/20/2012 - 19:23 | Link to Comment Xibalba
Xibalba's picture


Mon, 08/20/2012 - 19:30 | Link to Comment kito
kito's picture

gosh, vanguards s&p index fund, with a fee of 17 basis points, is looking better and better each day thanks to uncle ben...............

Mon, 08/20/2012 - 22:57 | Link to Comment Dr. Engali
Dr. Engali's picture

Kito you aren't looking for this market to make new highs are you? Because the only way that would happen is if they inflate more and that would mean ....gasp ..... More QE and a free turkey sandwich. Otherwise this markets about topped out and ready to roll over. So forget that vanguard etf and buy some pro shares short S&P

Mon, 08/20/2012 - 19:30 | Link to Comment The Fonz...befo...
The Fonz...before shark jump's picture

Morons wondering why they cant beat a manip and rigged market lol

One way to do it...shut it off and don't participate


Mon, 08/20/2012 - 19:32 | Link to Comment francis_sawyer
francis_sawyer's picture



Former Marine Brandon Raub Sentenced To Up To 30 Days In Psych Ward Over Facebook Posts

Mon, 08/20/2012 - 19:47 | Link to Comment kito
kito's picture

i hope all 25k make at least one phone call to their "representatives" least they will know that we know.......

Mon, 08/20/2012 - 19:50 | Link to Comment francis_sawyer
francis_sawyer's picture

I know... It was a big story here... The above link is an update to the same story as far as I know & so I thought some folks would be interested...

Mon, 08/20/2012 - 21:03 | Link to Comment john39
john39's picture

good chance this marine story is a psy-op.  it has that smell...

Tue, 08/21/2012 - 00:46 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

you may be smelling your future self
hard to tell what you'te thinking

care to say a bit more about what led you to this "good chance"

that is a statement about probability, is it not

an assesment based on data

now can you tell a more about that smell

that "psy-ops" smell :>  how does that sensation effect you

are you taking any prescription medicine

how would you have handled this if you were the FBI

local law
county mental health
secret service
marine veteran liaison

have you ever been or are you now a member of any of these organizations

have you been under any undue stress recently

can you tell us about that tin-foil hat you're wearing

where did you get these ears

Mon, 08/20/2012 - 20:28 | Link to Comment pd45
pd45's picture

Another one? In April this Marine was 'just' discharged. I guess he was lucky.

Mon, 08/20/2012 - 19:32 | Link to Comment yogibear
yogibear's picture

The Goldman Bots are making plenty of money stealing from everyone else.

Mon, 08/20/2012 - 19:41 | Link to Comment Gubbmint Cheese
Gubbmint Cheese's picture

They all need to buy more stock in Apple....


Mon, 08/20/2012 - 19:47 | Link to Comment chump666
chump666's picture

HFT fleecing.

We need a panic so shorts can break even.  Most probably a c-hair away

Mon, 08/20/2012 - 19:51 | Link to Comment chump666
chump666's picture

...between that and the dumb ass Europeans jawboning the market every day.


Mon, 08/20/2012 - 20:00 | Link to Comment Withdrawn Sanction
Withdrawn Sanction's picture

We need a panic so shorts can break even. Most probably a c-hair away

Is the dead-flat close on the S&P a tell????  Inquiring minds want to know.

Mon, 08/20/2012 - 20:21 | Link to Comment chump666
chump666's picture

Yes, false break out from it's August 15th highs, low volumes, slight pick up in volatility ala FX option hedges, USD bids, silver and gold now going bid, 10yr yields up, Industrial commodities selling/diverging from equities.  All would suggest that the rally is now topping out, do we get a panic?  Possibly.  Anything could set it off as money leaves stocks.  It's looking like Europe again.  Scenario:  Greece leaves the EuroZone, or Finland starts the pre-lude Germany exit. 

Google: Finexit rumors

Of course then there is China bear news too.

Mon, 08/20/2012 - 21:36 | Link to Comment WAMO556
WAMO556's picture

C-Hair????? That is jarhead speak. Maybe lost on the civilians, may have to clarify for the haute poloi? Just saying.

Mon, 08/20/2012 - 19:58 | Link to Comment Aquaman
Aquaman's picture

Well Duh. When you hold a gun to the head of anyone that shorts the market. And then if it does start to tank, just ban short selling. I could make that market go up. I can win at monopoly too if i grab money from the other box in the bedroom every time i get up to piss. Of course the hedge funds are underperforming.

Mon, 08/20/2012 - 20:08 | Link to Comment XRAYD
XRAYD's picture

11% is not bad. Now the 89% will start chasing, and take AAPL to $1,000!

Mon, 08/20/2012 - 20:22 | Link to Comment Mithril
Mithril's picture

The Bankers have almost destroyed our country and our Freedom.
End the Fed!

Mon, 08/20/2012 - 22:32 | Link to Comment Cthonic
Cthonic's picture

There are people/firms that specialize in assisting de novo hedge funds and providing back office operations whose ticket is punched by all the churn (~300 started in Q1 and 60% failed already).  Arthur Bell, Hannah Terhune, Green and Co. etc. not a week passes without some email advice on how to start up a hedge fund.

Mon, 08/20/2012 - 20:49 | Link to Comment icanhasbailout
icanhasbailout's picture

I lost my hedge fund job to a monkey with a dartboard :(

Mon, 08/20/2012 - 21:30 | Link to Comment orangegeek
orangegeek's picture

And when primary wave 3 down kicks into high gear, it won't matter who's outperforming the SP500.


The SP500 will be in the tank.

Mon, 08/20/2012 - 21:42 | Link to Comment ekm
ekm's picture

Ok, hendge funds are losing, assuming their books are ok.

Who is making money?

Tue, 08/21/2012 - 05:54 | Link to Comment StychoKiller
StychoKiller's picture

The Bernank, he's printin' it by the wheelbarrow...

Mon, 08/20/2012 - 22:53 | Link to Comment Bear
Bear's picture

These hedge funds had better get on the Fed-purchases band wagon or they'll lose out. They apparently didn't have enough AAPL in their quiver

Tue, 08/21/2012 - 01:46 | Link to Comment Freddie
Freddie's picture

LOL! Reminds me of the old corporate saying that "nobody lost their job buying IBM" computers for their big corporate employer.  

No hedge fund manager ever lost their job buying Apple (for their portfolio).  LOL!

The joke is that lots of them and mutual fund managers would buy Berkshire like lemmings.

Tue, 08/21/2012 - 04:38 | Link to Comment adsanalytics
adsanalytics's picture

Hedge fund beta at the moment is only 40% (post jump), so a strong performance by the market will be lagged by the funds by definition. On the other hand, a sell-off will have funds outperforming the market. The challenge, longer-term is unless funds are good at mean-reversion trading, they will underperform the market given the above zero equity risk premium.


Tue, 08/21/2012 - 07:51 | Link to Comment Seorse Gorog fr...
Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

I invested in a hedge fund and all I got was this lousy beta-shirt.

Do NOT follow this link or you will be banned from the site!