Thursday, January 26, 2012

Hedge fund performance for 2011 almost as bad as 2008

26 January 2012, EUROPE – The broad hedge fund industry had a very poor year in 2011, according to figures just in from the EDHEC-Risk Institute.  Only one of the five strategy groups that it tracks recorded positive performance over the year: equity market neutral, which managed to finish up 0.88%.
That comes over 12 months in which the S&P 500 returned 2.11%, thanks to a late spurt in December, while bonds, in the form of the Lehman Global index, finished up almost 10%.  The most popular hedge fund strategy, long/short equity, was also the worst performer, according to EDHEC-Risk.  It finished the year down 5.97% – underperforming US equities by more than 8 percentage points.
Other hedge fund indices report similar woes. The HFN Hedge Fund Aggregate index finished 2011 down 4.9%, and HFR's HFRX Aggregate index lost 3.98%. The latter's index that equal-weights each strategy lost more than 6%.  HFR noted that the decline for 2011 marked only the third calendar-year decline since it started tracking the industry in 1990, but it is also the second decline in the last four years.
The results lead some to question whether 2011 was actually a worse year for the industry than 2008.
Paul Simpson, head of systematic investments and portfolio manager for statistical arbitrage strategies at Old Mutual Asset Managers, said: "In 2008, hedge funds lost a lot of money – but at least it was only half what you'd have lost in the equity market.  In 2011, they didn't lose anything like as much, but that was in a year when equities were basically flat."  Simpson conceded, however, that the distribution of outcomes in 2011 was among the biggest he had ever seen.  "Even if you look within one strategy like global macro, the difference between the best and worst performer is absolutely huge for this year," he said.  "In both those years, the successful strategies tend to be systematic and short-term oriented – equity market neutral, shorter-term CTAs and statistical arbitrage."  While that has been true of equity market neutral in 2011, and was certainly true of Simpson's own Global Statistical Arbitrage fund, which finished the year up around 5%, unlike 2008, it seems to have been a trying year for managed futures (CTAs).
EDHEC-Risk has the strategy down 3.47%, HFN reports a 3.93% loss, and HFR's HFRX Macro/CTA index was down 4.88%.  Nabil Chouk, a research engineer at the EDHEC-Risk Institute, wrote: "With no clear trend in the short term and a year characterised by sharp reversals in the markets, the CTA Global strategy (+0.29%) was barely positive for the month [of December] while posting a moderate yearly loss."
It was also yet another bad year for funds of funds – which are supposed either to select the best funds or diversify risk exposures.  The HFRI Funds of Funds Composite index lost 5.51% – worse than the 4.83% loss posted by the broad investible HFRI Fund Weighted Composite index – and EDHEC-Risk's index was down 5.86%.  "The Fund-of-Fund strategy did not demonstrate any diversification effect, exhibiting a performance consistent with that of the worst strategy (Long/Short Equity)," wrote Chouk.
Despite all this, HFR reports that investors allocated $70bn (€54bn) of net new capital to hedge funds during the year.  And it wasn't all bad for every strategy. Positive returns accrued to short sellers, volatility funds, credit arbitrageurs and some distressed and structured credit managers, according to HFR's range of HFRX indices.
-Martin Steward

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