The UK’s Times Online, citing Hedge Fund Research (HFR), reports that hedge fund strategies of all sorts took a beating in August:
Of the 20 daily hedge fund indices tracked by HFR, only one managed a positive result in August with the other 19 showing a negative performance.
One fund index – the Macro index – lost more than 8 per cent of its value during the four-week period.
The uniformity of the losses across much of the industry raised questions over the role of hedge funds, which market themselves as alternatives to traditional equity investment in return for large fees. Hedge fund managers have traditionally been seen as traders able to avoid the bumps of turbulent markets and capitalise on volatility.
Not surprisingly, the article suggests that hedge fund fees may become harder to defend:
According to HFR’s data, the Global Hedge Fund Index – which includes a variety of strategy funds including long/short – lost 2.55 per cent of its value. Long/short funds pick cheap stock to buy and dear stocks to sell.
One hedge fund insider said: “Much of the money invested in hedge funds goes into long/short. These guys are pretty similar to conventional long-only managers. The main thing that distinguishes them is the outrageous fee they charge.”
For at least the last two years, critics of hedge funds have argued that investors were overpaying for the results that the typical hedge fund provided, yet fees have been remarkably immune to price pressure. But continued weak performance and withdrawal of client assets could finally lead to a change.
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I am very sceptical of these hegde fund indices – bear in mind that one index provider categorized a leveraged long structured credit strategy as “fixed income arb”. So who knows what they lumped in with global macro?
I agree you have to take the indices with a grain, maybe even a handful of salt, particularly given that indices for supposedly the same strategy (“event driven”, say) published by different services will show returns that often differ by at least 1%. Yet these indices are used by fund consultants to analyze performance and make recommendations to institutional investors on which fund to invest in.
Nevertheless, the indices cover a fairly large number of hedge funds, and in aggregate showed a loss for August. It’s a big enough, even if imperfect, sample so as to be telling.