2011 Hedge Fund Returns: Investors Looking for Answers

January 8, 2012

With the final tallies in on hedge fund’s returns in, it is clearly evident that the markets were indiscriminate in their treatment of fund managers without regard to size, management experience, asset class or strategy. For investors looking for clues as to how they should allocate their funds in 2012, the results provide no clear direction on top of plenty of discouragement. While there were some bright spots among the performances, you’d be hard pressed to link them to a discernible pattern that might reveal any harbingers for 2012.  In one sense, the winners and losers in 2011 looked as if they were selected by a monkey throwing darts. All in all, there’s not much there for investors to go on as they look to 2012.

We did learn that bigger is not necessarily better as mega-funds such as three of John Paulson’s funds found their way into the bottom 20 with his Advantage Plus fund leading all losers with a -52%. And, past success didn’t work to many fund managers’ advantage as funds like Highbridge, Fairholme, Lone Pine Capital and Maverick Capital all took double digit dives. In 2011, a fund manager had a good year if they beat the index which was down about 4%, so funds such as Pershing Square, Horseman Capital, Ivory Capital, Omega Partners, Third Point and Cobalt, could all claim victory although they ended the year in the negative.

At the other end, Jim Simons’ Renaissance Equities topped all winners with a 34.66% gain. John Thaler’s JAT Capital could have very well topped that except for its gamble on NetFlix which dropped it down to a respectable 14%.  And Blackrock showed that the big can be better as it posted two of its funds in the top 20.  It seems as if everyone else was thrown into the muddled mix of positive single digit returns to low double-digit losses.

A clear picture emerges when looking at hedge fund performance based on strategy. In a analysis published at Frank Voison’s Frankly Speaking, those funds pursuing a fundamental value strategy were the worst performers at -23.6%, while merger arbitrage, convertible arbitrage, equity market neutral and absolute value strategies managed to beat the index with losses of 2.5% to 4%.  Fundamental growth, market directional and equity hedge strategies were all double-digit losers. While this may give investors something more to go on, suffice it say that past performance is no indicator of future performance even for hedge fund strategies.

The silver lining for hedge fund managers, large and small, is that investors don’t appear to be deterred by the off performances. And, although the likelihood of more market volatility and uncertainty is as great now as it was at the end of 2011, investors seeking returns beyond government bond yields have no other choice. By now, expectations have been lowered, and most investors are looking at the market as undervalued. This year, however, they will expect their hedge fund managers to earn their keep and keep the range of price volatility to a minimum.


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