Two And Twenty And Zero To Show For It As Hedge Funds Underperform The Stock Market

Tyler Durden's picture

With AAPL and several other strange-attracting hedge fund hotels dominating the holdings of the 2-and-20'ers, we thought it timely that Bloomberg TV would point out today that their aggregate hedge fund index is now significantly underperforming the S&P 500 (from both the top in 2007 and the lows in 2009 - in order to be fair). While the assumption is that 'sophisticated' investors are paying for alpha - and as always the focus is absolute return on the way up no matter what the mandate - it seems the extreme correlations both across asset-class and within-and-across individual equities (as we have discussed in depth - most recently here) have indeed eaten into any 'value' that has empirically been added. As The Economist notes, in June "funds suffered the largest withdrawals in assets since October 2009." Furthermore, as Citi's recent study on risk drivers shows, the high-beta momentum trade has become by far the most crowded trade around - so even sales of DB9s and NYC apartments are now entirely dependent on NEW QE coming before year-end.



Hedge fund aggregate returns (Bloomberg and HFRX indices) have notably lagged the S&P 500...


Citigroup uses short interest as a way to assess the "crowdedness" of factor exposures. The chart below shows the rank correlation between the short interest ratio, defined as short interest outstanding divided by shares outstanding, and long-term price momentum. This analysis is based on the Russell 1000 universe. As this correlation becomes more negative, it signals that the factor is becoming more crowded. That is, an increasingly negative rank correlation indicates that there is more short interest in low momentum stocks and less short interest in high momentum stocks, suggesting a growing consensus regarding momentum. Currently, this analysis suggests that the long term price momentum factor is becoming VERY crowded.

and as The Economist notes:

There are lots of claims, and counter-claims; in this area; lots of studies that try to account for factors such as survivorship bias and volatility. But a few things seem pretty certain.

  1. Many hedge fund managers are smart, and some managers may be a lot smarter than the average investor. The difficulty is in identifying those investors in advance.
  2. There are some generally uncorrelated strategies but these niches can be quite small, and consist of illiquid assets. As a result, the lack of correlation with the big asset classes may be partly caused by the slowness of price adjustment in such assets, since deals are less common. But the corollary is that it is difficult to exit such strategies in a crisis, with the result that there are occasional steep drops in valuations.
  3. For the bulk of the industry there is likely to be a reasonable correlation with indices such as the S&P 500. As the industry gets larger, this correlation is likely to increase and it will be harder for the average manager to outperform.
  4. Hedge fund managers will thus be subject to the same constraint as mutual fund managers; that returns are equal to the index minus costs. And since their fees are higher, the result will be disappointing returns for the average investor.



Source: Bloomberg, Citigroup

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Zola's picture

The Bernank is killing the hedge fund business with his overt  (QE,Twist) and covert interventions (gold , oil, PPT etc...). 

We are all communists now ... Living under the rule of the new Joseph. No wonder everyone is getting poorer and poorer even though they do everything right. That's collectivism for you ! 

Freddie's picture

How is that Hope & Change working out for you hedgies?  Loads of you love Obam and gave him lots of $$$.   You elites then selected RINO Romney as plan B.

Hedge Funds are the market now.  Only a very few (less than 10)  really really good ones can beat the market.


True.North's picture

I think Bwater is crushing it based on the Daily Observations alone. Wondering about Canyon, AQR and Moore.

Harlequin001's picture

This is bullshit. How can you on the one hand publish information which shows that the S&P is manipulated yet have a go at hedge funds for not outperforming it?

Unless you're on the board of the Fed or a politician there is no way you can know what non economic decisions these people are going to make. In this environment, simply holding onto your cash is a fucking achievement.


Everybodys All American's picture

How do you hedge when the Fed is nearly always forcing the market to the upside so only your long positions seem to ever work? How do you hold any US paper when the yield is near zero? How do you buy long positions when the major unanticipated moves are made pre-market by the Fed?  How do you trade fundamentals when mark to model is the accounting rule? How do you trade when insider knowledge is handed out to the well connected and not you? How do you trade when the fundamental economy no longer reflects the stock market?

You can't. These are the unintended consequeces of our Federal Reserve monetary policy.

Larry Dallas's picture

If you were a fund manager who was yesterday's hero in performance, then leveraged that performance to get more AUM, which translates into a higher management fee, why the hell would you want to do anything but sit on assets and collect your fee.


When history is written, it will show that these guys merely sat on assets, let inflation creep, and created little to no value for their LPs.



disabledvet's picture

Won't stop people from believing tho. So much easier to convince people with lots of money to do something they would never dream of doing "when they were first starting out."

doc_in_the_house's picture

hedge funds are legends in ur mind

many of them are DOWN !! ex john paulson with his slope of hope GLD position !!! LOL !!

and so many of them own AAPL? its a short @ $600 = hold til sub $200 = many stupid hedge funds (not hedge funds but leveraged on margin gamblers) will LOOSE BIG !!!

easy way to hold AAPL short to sub $200 = SELL deep in the $ covered PUTS on massive sell-offs...ex next time it goes to $490-$ back those puts on massive pumps, ex back to $570.....repeat next time it drops to $400..... @ $200 = long term capital gain = less taxes, but short term capital gains on your PUTS profits.

Bear's picture

I'm for AAPL-Dumpling time ... AAPL hits 598.25 afterhours

I am a Man I am Forty's picture

I would try shorting something other than the best company in the world.  Just a suggestion.  I'll shut up if you've ridden RIMM down from $140, but I'm guessing that's a no.

doc_in_the_house's picture

aapl has joined the $500b club....

just like CSCO, MSFT and GE....ONCE DID.  they WERE the best companies in the world.  Competition is coming for aapl from all angles...just like it did with Ford in the 1920s or so...others invented 4 wheeled cars....

nothing last forever...not even diamonds...their reference state is graphite! sorry !!! yes it SPONTANEOUSLY disintegrates to graphite...over a loooong time.

maybe what does last forever is gold...but i want the PHYSICAL @ $350 = i'm all in !! i can then easily hold for 50+ years and pass on real wealth.

Debtless's picture

Well, they certainly have some of the 2 left to show for it. 

That's of course, assuming it wasn't all spent on hookers and blow.

RobotTrader's picture

Hilarious.  If those stupid hedge funds would have "bought and held" IYR, VNQ, and XRT,


They would have achieved, steady, reliable returns without the least bit of worry about:

1) Europe Crisis

2) Currency Gyrations

3) Metals and Mining Depression

4) Emerging Market Slowdown

5) QE or No QE "jitters"

In an nutshell, anybody who bet on the U.S. Consumer and stayed with the bull market in well-diversified ETFs instead of trying to chase every wiggle on the chart would have made out huge with very low expenses and hardly any trading costs.

Why didn't any of the hedge funds employ this simple and easy strategy?

Because there are hundreds of "gloom and doomer" websites and blogs that are screaming crash every day and saying we are headed for a system meltdown, hyperinflation, and the U.S. Consumer is dead for years as he deleverages.

What actually happened was the exact opposite of those dire predictions.

Tijuana Donkey Show's picture

Robo! Where have you been! You should be a fruit farmer with all the cherry picking you have here. I invest with Adam Monk, he's better than Bill Miller at Legg Mason.

doc_in_the_house's picture


thanks !!!

NeedleDickTheBugFucker's picture

Hilarious.  If those stupid hedge funds would have "bought and held" IYR, VNQ, and XRT,


From your friends at Investopedia:  Hedge - Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.

It's a shame you can't view stock charts with a longer time frame as both IYR and VNQ are still below where they were in 2007.  I guess RT really stands for Round Trip.

I should be working's picture

Yeah, but what's the fun in betting on low risk 'sure thing' investments?

Low beta, low risk, income investing always outperforms.  But it's too boring for the Masters of the Universe.  They prefer to chase NFLX, GMCR or Faceplant.

Rainman's picture

Risk off is a disinfectant'll kill off all the germs

EverythingFubar's picture

Guys, hijacking thread:

US departments gain emergency control over internet

US President Barack Obama has signed an executive order giving government agencies unprecedented powers to control communications networks during emergencies, according to a privacy lobby group.

The order — titled 'Assignment of National Security and Emergency Preparedness Communications Functions' — gives the US Department of Homeland Security authority to seize private communications facilities and effectively control of the internet.,us-departments-gain-emergency-contr...


How do we let Tylers know about interesting/ominoous stories like the above? Doesnt seem to be any way of submitting stories to ZH?

What happened to Congress? You still have Congress dont you??

Tijuana Donkey Show's picture

Already been clubbed like a baby seal.....

midgetrannyporn's picture

If they can take 2% off the top and have the fund break even in this environment over the long haul that is incredible. I begrudge my fund managers their measly 0.25% yearly and moved away from any funds that charge higher than that.

hedgeisforpussies's picture

robo every dog has its day. you have a right trade on right now but the facts are changing. the question is will you be right in a year's time. i think you wont. hf use tight stops these days and are in liquid assets only which is why they get whipsawed day in and out. swings are big and stops are tight. thats why all these big guys like soros are returing investors' money and retiring. the funds killed the golden goose. like everything else in life this industry will kill itself. all hedgies are currently long apple. einhorn pushing it on tv. well lets see what apple reports in two weeks. last time they reported hedgies dumped the stock at higher open. my bet it will be the same this time around. 

Rainman's picture

Farmers are ready to throw in the towel on futures betting after back to back scamming at MF and PFGB .

Thanks, Gary, for all your help in fucking up another market

youngman's picture

Even today these hedge fund managers are thinking up my products to try to get the "return" they so desire....HFT´s...ETF´s...bribe the BLS guy...whatever...they just can´t play by the rules.....they have to cheat..

mjk0259's picture

The customers may be getting zero but the managers are still rolling in it. What do they care.

Dark Trader's picture

but the Sharpe ratio! what about our downside capture? [/sound of money walking after redemption period]

dangni's picture

Not to be outdone, birkenstock sandals is well known for having Heidi Klum on their books as a designer for the company and the former super model can often be spotted with her favourite pair of birkenstock outlet on.

knukles's picture

Please die a slow painful death.

knukles's picture

I knew a whole boatload of hedge fund pioneers.
Most of whom in their immediate prior incarnations were common every day ordinary stock and bond salespersons before establishing their promised riches machines.

Brilliant my ass.
Maybe very smart, bullshit artists, socio or psychopaths, but brilliant?

Also reminds me of listening to the Big State Pension Fund bo-hunks way back when touting Private Equity.... because it was undervalued.
The valuations were based off of public companies and did not trade in some rarefied atmosphere they'd only recently discovered.  Like there was no JP Morgan or Goldman in the picture.


bankofvol's picture

With all due respect, while your conclusion is correct, your process is flawed. You are comparing apples to oranges, you are taking the SP500 instead of SP500 total return index. No fund gives dividends to charity to my knowledge, so the only correct index to compare a fund to (assuming the fund has the SP500 as investment universe) is the SP500 total return, which would not invalidate your conclusion but rather reinforce it as it would show an even higher lag. SPIVA data, also shows year in year out that 85% of active managers underperfom their benchmark and that the multi-trillion active asset management industry is selling thin air, thanks to the power of marketing. Active asset management industry is in that respect very similar in it statistics to casino industry but with less fun for the clients.