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FT: A Losing Hedge Fund Industry Is Still Piling Up Fresh Money

By    |   Thursday, 12 December 2013 07:45 AM

Hedge funds are reeling in billions of dollars in fresh money despite the fact they are underperforming the broader stock market. In fact, money put in a passive stock index mutual fund in 2013 would have beaten the average hedge fund easily.

The Financial Times cited industry estimates that hedge funds have amassed $360 billion in new money this year.

"The continued growth comes as investors lower their expectations of returns from hedge funds and instead view them as a way of increasing diversification and reducing volatility in their portfolios," the Times explained.

Editor’s Note:
Opinion: Retirees to Be Hit With Social Security Cuts

For institutional investors, the use of hedge funds also provides them a handy way to manage the back end of their capital infrastructures in a more regulated world.

Hedge funds are installing an "increasingly expensive compliance and reporting infrastructure" to accommodate institutional clients, the Times noted. Hedge funds are also customizing their investment options for the institutional crowd, including individually managed accounts.

As a result, an estimated 66 percent of hedge fund assets are coming from institutional clients.

Prequin's 2014 Global Hedge Fund Report, which will be published in January, is expected to show hedge fund assets now total about $2.7 trillion, according to the Times.

But what about their performance?

According to Bloomberg, hedge fund returns in 2013 are trailing stocks by the biggest margin since 2005.

Bloomberg data showed the funds gained 7.1 percent this year through November, compared with the 29.1 percent return for the S&P 500 index with reinvested dividends.

A deeper dive in the numbers provides an even more dismal picture. Bloomberg reported that since the end of 2008, hedge funds have underperformed the S&P 500 by a whopping 97 percentage points.

To make matters worse, the hedge fund industry traditionally charges clients fees of 2 percent of assets and 20 percent of profits. Those figures should be subtracted off the top before figuring the actual return from the average hedge fund investment.

Financial author and investment manager Barry Ritholtz wrote in an article for Bloomberg that there are multiple reasons for hedge funds' poor record.

Ritholtz said the industry has become too swollen, with about 10,000 hedge fund firms and individual funds that are too bloated to be nimble or effective. In addition, he said many of the firms are now highly leveraged — a phenomenon that perhaps could come back to haunt them in a market that has come so far and so fast.

Editor’s Note: Opinion: Retirees to Be Hit With Social Security Cuts

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Hedge funds are reeling in billions of dollars in fresh money despite the fact they are underperforming the broader stock market. In fact, money put in a passive stock index mutual fund in 2013 would have beaten the average hedge fund easily.
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Thursday, 12 December 2013 07:45 AM
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