Hedge fund performance is still lagging the market and winners are few and far between

Published Sun, Aug 29 20218:35 AM EDT

The hedge-fund industry's underperformance has been well documented over the years, but its recent mediocrity is particularly disappointing given the comeback in volatility. Hedge funds gained 9.2% in 2021 through the end of July, just about half of the S & P 500's return during the same period, according to HFR. Among more than 100 long-short hedge funds that HSBC tracks, about one fifth are beating the S & P 500's 20% year-to-date gain, according to the firm's prime brokerage data. Looking at the wider universe of over 400 funds, only 13 have produced a return more than 30% in 2021, the data said. To make things worse, every single hedge-fund strategy is lagging the market this year on average — from event-driven funds, to macro-focused, to managed futures and convertible arbitrage, according to Credit Suisse prime brokerage data. The industry comes with lofty fees as they typically charges clients 2% of assets and 20% of profits. That's significantly higher than actively managed mutual funds, not to mention a sea of uber-cheap index funds and exchange-traded funds. Still, the persistent underperformance and high fees didn't stop the industry from attracting new capital. In fact, hedge funds' total assets under management have swelled to a record of $3.8 trillion, according to HFR. Proponents of hedge funds often say that outperformance and alpha is never the industry's goal. "Their purpose is to hedge. Their initial intention is to provide uncorrelated return in a market disruption," said John Bowman, senior managing director at CAIA Association. "It plays a critical role in any long-term portfolio. I think the biggest misunderstanding is this tendency for us to compare it against the S & P 500." The industry did provide a bit downside protection during 2020's brutal spiral into a bear market. During the first quarter last year at the height of the Covid crisis, hedge funds fell 11.6%, compared to the S & P 500's 20% loss, according to HFR. One optimistic sign for the industry is a rebound on the short side of its strategy. Hedge funds' short book generated in July the best alpha since 2010, and now it's outperforming the long side of their strategies, according to Morgan Stanley prime brokerage data. Shorts' comeback following a tough start to the year when the infamous GameStop mania inflicted huge pain for short sellers betting against the brick-and-mortar retailer.

A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Aug. 23, 2021.

Michael Nagle | Bloomberg | Getty Images

The hedge-fund industry's underperformance has been well documented over the years, but its recent mediocrity is particularly disappointing given the comeback in volatility.