Hedge Funds Down, Investors Wait

Terry Flanagan

Despite a disappointing year for hedge funds, investors hang on for a hopeful revival in 2012.

As of last month, Hedge Fund Research’s HFRX Global Hedge Fund Index was down 0.59%. In fact, the benchmark index is down just over 9% for the entire year; with little wiggle room for a comeback given that New Year’s Day is not very far on the horizon.

The Standard & Poor’s 500 Index was down about 2.2% over the same time period. Such a disappointing performance has disillusioned some investors toward active management.

“In regards of beating the market, I’ve always said that most investors will do so by investing in low cost index funds, versus active managers,” said Burton Malkiel, former board member of The Vanguard Group, economist and author of A Random Walk Down Wall Street, and chief investment officer of the China-focused indexing firm AlphaShares.

“In a flat, volatile environment, dollar cost investing averaging methods can make money…the investment thesis here is that most investors would be better off broadly diversifying.”

Yet, part of the allure of hedge funds is their ability to diversify and provide something different, and better, than broad market returns.
Industry-wide strategies incurred losses, but commodity trading advisors (CTA), and some global macro, and relative value strategies made modest short-term gains. CTAs gained 1.67% during the first half of December; convertible arbitrage funds added 0.27%; and multi-strategy relative value funds 0.18%.

December’s modest gains were countered with more substantial losses. Fundamental growth funds fell an average of 2.57%; market directional funds 1.57%; and event-driven funds 0.69%.

Despite poor performance, hedge funds investors are holding as redemptions are lower than December of 2010. According to the GlobeOp Forward Redemption Indicator, hedge fund investors sought to pull 4.58% of industry assets this month, compared to 4.59% a year ago.
The industry also generally sees the highest redemptions at the end of the year, according to GlobeOp Chief Executive Hans Hufschmid, as “such as seasonal pattern is a sign of preparation to rebalance their portfolios at year end.”

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