Not Again - Following Abysmal 2011, Only 10% Of Hedge Funds Are Outperforming The S&P In 2012

Tyler Durden's picture

Too bad not every hedge fund can be long Apple (even if as Goldman points out, they sure are trying - "One out of five hedge funds has AAPL among its ten largest long positions" - a truly stunning observation and one which means that if Apple, which is priced to absolute perfection, has even one hiccup, we would see an absolutely epic bloodbath in the market). Because if 2011 was a horrible year for hedge funds which closed the year well below, or -10%, their respective benchmark - the S&P (unch for the year), the last thing hedge fund LPs can afford is another year in which they pay 2 and 20 to generate a return lower than the S&P. Yet to their horror, this is precisely what is happening. According to Goldman's latest Hedge Fund Tracker, "The typical hedge fund generated a 2012 YTD return of 3% through February 10th compared with 7% gains for both the S&P 500 and the average large-cap core mutual fund." Yes, there are outliers, but far and wide this means that even more redemptions are about to hit the hedge funds space, where jittery investors will no longer show any restraint before sending in that redemption letter. It gets worse: "The 60-fund Dow Jones Credit Suisse Blue Chip Hedge Fund IndexSM has returned 3% YTD, in line with our sample average.... The distribution of YTD performance indicates that 50% of hedge funds have  generated returns between -2% and +2%." And the absolute kicker: "Only 10% have returned more than 7%, outperforming the S&P 500." Another way of saying that is that 90% of hedge funds are generating negative alpha! If that is not the signed, sealed and delivered notice of death of the hedge fund industry courtesy of not ubiquitous central planning, we don't know what is.

What is causing the drag? Don't laugh: "Fund “hedges” have created a drag on performance - Despite finding success with their top picks, lack of net exposure to the cyclical rally has caused hedge funds to lag both the S&P 500 and the average large-cap core mutual fund so far in 2012. Hedge fund net long exposure rose to 46% in 4Q 2011 vs. 36% at the end of 3Q 2011, but remained below the 50% net long exposure one year earlier in December 2010." In other words: want to outperform the market, why don't hedge of course. Just put all your money in central planning, and in the faith that diversification is meaningless, and that Ben Bernanke and his cohort of clueless academics can take the world from Insolvent point A to perfectly Solvent point B.

Showing this shocker visually for 2012 YTD:

2011 is already well-known, but here it is again:

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slaughterer's picture

For many of these underperformers, the AAPL shareholder meeting is starting in 30 minutes:
1.) Recurring divi
2.) One-off divi
3.)  Stock split
4.)  Stock buyback
5.) Nothing
I lay my chips on number 5.

Squid Vicious's picture

The obvious answer: buy more AAPL!  what could go wrong?

slaughterer's picture

5 (and no more "creative" products)

Seasmoke's picture

ive always rather lose all my money you dont have beat the 2 and 20 scam vig and you are ahead of the game

JPM Hater001's picture

Why does the stock market still look drunk?

runthenumbers's picture

Not surprising, when your model depends on being long and short and the market only goes up, you are gonna underperform.

YesWeKahn's picture

they should be all in (AAPL)

carbonmutant's picture

Gotta be on the FED's A-list if you want to get the emails...

Dingleberry's picture

What's new? In an up market, 90% won't beat the indexes. Hedgies and fundies only do well in down or extremely volatile markets. That's why Bogle, et al, preach indexes. Low fees in addition.....unless you have buddies at Goldman helping you out with some fraud like Paulson did.

Bam_Man's picture

"Where are the customers' yachts?"

It is all about the "2 and 20". Period.

Zola's picture

the constant meddling of the fed makes it impossible to create alpha on the short side. Then you should play russian roulette and lever long to beat the market and lose it all when reality reappears. everyone knows it will at some point yet you may not survive until then. Idiot politicians at work again. One thing i am pleased with as another posted said is that a giant bear market has started in government intrusion in the economy and our lives and i just wish it proceeds swiftly and decisevly

anonnn's picture

Essence of Hedge Funds: Just another game based on misplaced trust.  Akin to a "software patch" in an old  con-game.

 Gambling with OtherPeoplesMoney to accumulate wealth thru commissions,fees,rebates, under-the-table payoffs by recipients of the" investments", "unearned income", tax loopholes, etc  until the failure of non-performance/exposure of embezzlement/etc ends the gleeful game and the HF manager simply walks away with all his acccunulated wealth taken from hapless marks.

As for the hapless marks, our misplaced trust demonstrates , over and over, our own miseducation.


Robslob's picture



Hedge accordingly...

long-shorty's picture

"Another way of saying that is that 90% of hedge funds are generating negative alpha!"

This is clearly not one of the Tyler Durdens who understands the definition of alpha. I'd say this TD is radically underperforming the other TDs.


FoieGras's picture

90% don't have the S&P as their benchmark. You can't produce negative alpha vs. an index that's not representing your investable universe.  Another clueless article, sorry to be so harsh.

hyper-critical's picture

What is their investable universe? Everything. Which is why it is reasonable, though not necessarily MPT-theoretically sound, to compare returns to the S&P. Many, many people invest in hedge funds because they are looking for (often times non-correlated) above-average returns relative to the broad markets.

Also, take a look at the hedge fund benchmarks - their historical performance is abysmal. I'm convinced the HFRI indexes are sponsored by the industry. With a bar that low, I could "generate alpha" easier than Brianna Banks can take a dick.

rosiescenario's picture

If the funds own so much AAPL, just who are they going to be selling it to when they get redemptions? I don't think AAPL has to hiccup for there to be a bloodbath in its stock.


This reminds me of the old 'nifty fifty' but without the other 49 for diversification. Apple appears to be the 'one decision stock' on this age.