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Hedge funds post worst stock picking in 7 years

Traders on the floor of the New York Stock Exchange
Andrew Burton | Getty Images
Traders on the floor of the New York Stock Exchange

Hedge funds posted their worst quarterly stock picking performance since the financial crisis last quarter, according to data from a major Wall Street firm.

The woeful returns came during a little-changed market so far in 2016, just the kind of environment when hedge funds are supposed to thrive.

"Global stock picking alpha across equity long/short managers was negative 4 percent in 1Q16, the worst quarter in at least seven years and the worst quarterly return by more than 2 percent," Morgan Stanley's John Schlegel wrote in a note to hedge fund clients Thursday.

Morgan Stanley is the second-largest hedge fund prime broker in the world with about 1,700 clients, according to hedge fund data firm Preqin. "Alpha" measures a manager's stock picking ability by calculating the excess return of a fund's positions relative to the market.

Big investors in hedge funds are taking note of the poor performance.

"Investor sentiment was skewed negative in 1Q16 as many investors were frustrated by challenging hedge fund returns YTD. It seems many investors held off from allocating to additional mangers," Schlegel wrote.

So why have hedge funds underperformed and how do they plan to make a comeback?

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