2011 Hedge Fund Performance

In a year when the S&P 500 finished flat, many hedge fund managers once again failed to produce -- so much for absolute returns. 2011 was a tough year, but three styles stood out: Global Macro, Fixed Income Arb, Equity Market Neutral managers were able to eke out modest end-to-end returns.

(Click to enlarge)

In addition, when viewed over a longer time-horizon only two styles (Global Macro, Fixed Income Arb) produced impressive end-to-end performance numbers when compared to the S&P 500.

(Click to enlarge)

Once again many investors placed money with funds that produced stellar returns over the previous year. Unfortunately simple momentum strategies never end well for investors, and 2011 may have finally brought that message home. While hedge funds have suffered through terrible years in the past, one gets the sense that investors are waking up to the fact that there just aren't that many great trading ideas and consistent managers around. The release of Simon Lack's book is sure to give investors pause about hedge funds as an asset class.

"Investors anoint a new hedge fund demi-god all the time," said professor Jim Liew, who teaches hedge fund strategies at New York University's Stern School of Business. "But they are bound to be disappointed because the rule of thumb is that a manager who can be up 40 percent one year can be down 40 percent the next. They are absolutely human."

... "After 20 years of investing in hedge funds, I finally realize they are not the holy grail but an asset class with enormous fees, illiquidity, high leverage and hidden risk given their lack of transparency," said Bradley Alford, chief investment officer at Alpha Capital Management.

Below is the relative illiquidity of the different DJ/Credit Suisse indices. Note that Global Macro, the top performer over the last 12/24 months, is also the most liquid style:

(Click to enlarge)

MAXIMUM DRAWDOWN
Here is the graph comparing the riskiness of the top 2 performers in 2011 (Global Macro, Fixed Income Arb), and the S&P 500. For visual purposes I normalized the time-series so all three had a common starting value. Note the low volatility of Fixed Income Arb, didn't shield it from a drawdown that was even larger than the maximum drawdown observed from Global Macro:

(Click to enlarge)

See my earlier post for graphs highlighting the Maximum Drawdowns of other trading styles.

[Hedge Fund performance from previous months can be found here. More details, including sector/style descriptions and methodology, are available here.]

Related posts:

Long-term performance of Venture Capital & Hedge Funds

The inside scoop on how investors pick Hedge Funds: A simple momentum strategy for picking hedge funds leads to suboptimal returns.

Tweet