Hedge Funds No Longer Such a Good Bet
Eighty percent of hedge funds , the so-called “smart money,” have delivered negative performance this year, with more than half losing 10% or more, according to data collected by Bloomberg.
With returns of secretive hedge funds , which are not required to disclose their returns, difficult to obtain, Bloomberg analyzed two indexes of investments that are favorite bets of hedge funds , compiled by Goldman Sachs.
This reveals that hedge funds ’ favorite stocks are down 31% year to date, while the sectors they tend to short, or bet against, are down 20% — not as much as other sectors of the market. In other words, hedge funds are losing money on both their long and their short bets.
In a further analysis by Bloomberg, equity hedge funds are down 15% this year.
Looking at the biggest hedge funds thought to have the magic touch, Tiger Global is down 52%, Long Pine Capital is off 42%, D1 Capital has lost 28%, and Pelham Capital has slumped 32.5%.
On top of this sea of red ink, hedge fund investors typically pay a 2% annual investment fee and, when there are profits, 20% of those returns back to the hedge fund manager .
So, investors who lack the typical $1 million minimum investment for a hedge fund can take heart. These exclusive investments reserved for the very wealthy aren’t doing much better than your, likely, miserable 401(k) returns this year.In fact, the hedge fund universe has become so competitive that the near-term outlook for the niche, which has been in existence for 70 years, isn’t too bright.
With the exception of the dot-com crash of 2001, the Great Recession of 2008 and the start of the COVID pandemic in 2021, markets have been strong, all the while interest rates and inflation have been low. This powered strong returns for the past 30 years, Bloomberg explains.
In turn, this has prompted many hedge fund managers to reduce their hedging. Why take on that risk when money could be more readily had on high-flying technology stocks?
Making investing more complicated for would-be quick-footed hedge fund managers, low interest rates have prompted many companies they invest in to buy back their stock over the past decade, artificially boosting their shares.
For short sellers, any cash they held after selling shares paid less in the low interest rate environment.
The upshot is that returns have been squeezed — and investors have been running for the exits. In the past five years, hedge fund investors have redeemed more than $100 billion of assets, and year-to-date through August, they have yanked $25 billion out of hedge funds , according to EVestment.
All of this has been occurring in the new age of retail investors empowered by meme stocks and social media gravitas. This has emboldened them to arm themselves with commission-free brokerage accounts.
“Crowding; retail investors becoming much more sophisticated, agile and organized; and interest rates being so low — have been major headwinds for long-short equity funds,” says Edoardo Rulli, deputy chief investment officer at UBS’ hedge fund solutions business .
