Did Investors Make a Mistake?

Chidem Kurdas

As of the end of March, hedge funds had recovered all but 1.6% of their 2008 loss, whereas the MSCI World Index was still down 24.4% from its peak, according to data from the Credit Suisse/Tremont Index.

Of course investors who took their money out of the funds did not benefit from the resurgence. They would’ve recovered the losses had they stayed with the investment, says Oliver Schupp, President of Credit Suisse Tremont Index LLC.  He points out that compared to many asset classes, hedge funds performed well.

The 2008 peak-to-trough loss for hedge funds was 19.5%, compared to 52.7% for the MSCI World Index. The steeper drop means that  traditional stock portfolios have a long way to recover, despite big gains in the past 12 months.

During the crisis hedge funds acted much faster than traditional managers to limit losses, with the net effect that the compounded rate of return for hedge funds is attractive, says Boris Arabadjiev, chief investment officer of the Credit Suisse fund of hedge funds group.

So, did people make a bad mistake by getting out of hedge funds at the bottom? I asked a long-time investor, who says many investors were forced to redeem because they had to meet margin calls elsewhere and in any case it depends on the individual manager. The above numbers are averages for hedge funds as a group, but maybe your manager was not capable of recovering.

It is true that returns are widely dispersed among hedge funds in each strategy. For example, in the first quarter of this year the best-performer gained 17.5% while the worst-performer lost 20.4% in  event-driven strategies. Traditional managers show less variation—-they all tend to buy the same names.

But how would you know before the fact that manager x will not make back the loss and manager y will? For one thing, you watch how they respond to the new market environment, says the investor. If you’re confident about the response, you should stay with the fund.

The overall picture looks attractive enough that investors are willing to jump back into the fray. Comparing hedge fund returns to various indexes from 1993 through 2009, a period that includes the Asian currency crisis and the Long-Term Capital Management debacle as well as the collapse of the late 1990s stock bubble, Mr. Arabadjiev shows that the funds’ risk-adjusted returns are by and large better than other assets’ performance.

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