Thursday, July 12, 2012

"Dumb Money: Hedge Funds Can't Even Beat Bond Funds"

Today's headline comes courtesy of CNBC, which published a short piece on Tuesday.

The article notes that hedge funds - supposedly managed by the best and brightest money managers in the industry - are having a awful time in the markets.

Here's an excerpt:

Hedge funds  as a group are badly underperforming this year, which could lead to a series of redemptions, closings and rethinking of the lofty fee structures the managers of these alternative vehicles enjoy.

The Bank of America Merrill Lynch global diversified hedge fund composite index returned just 1.3 percent in the first half of 2012, well below the S&P 500’s 8.3 percent gain.

Funds that focus on betting against stocks performed the worst, falling 7.1 percent as a group, according to the report.

Perhaps even worse than their underperformance of the S&P 500 was that the group trailed the iShares Barclays Treasury Bond ETF  which is up almost six percent on the year.

The piece goes on to quote several prominent hedge fund managers offering explanations as to the reasons behind their most recent troubles.

However, but the bottom line is this:  Despite their lofty fees and reputations, the returns from the hedge fund community just hasn't lived up to the hype.

Now, to be sure, this has been a tough year for active managers.  According to Merrill Lynch, only 28% of fund managers have outperformed the S&P 500 year-to-date.

On the other hand, core equity managers have returned on average +7.9% total return versus +9.5% for the S&P which is 800 basis points better than the average diversified hedge fund.

And yet money continues to flee traditional stock funds in favor of alternatives.