Investors on occasion express doubt as to whether hedge funds are worth the trouble. So let’s compare the performance of Daniel Och, a well-established and highly regarded manager, with a broad-gauge investable index.
The largest fund Mr. Och manages, the Och-Ziff Master Fund with around $19 billion in assets as of November, made 8.44% in 2010. The MSCI All Country World Investable Market Index made 11.4%—almost three percentage points more than OZ Master Fund. Should institutions just put their capital into an index?
To make the case for investing in hedge funds, you have to look at performance over cycles. In the crisis conditions of 2008, OZ Master Fund lost about 15%. World markets went down by more than 50%. What’s more, the effect of the much smaller loss continued for years: an investor in OZ recovered and started to make money significantly earlier than an investor in a market index.
OZ made near-absolute returns in the past three years, demonstrating ability to largely – though not fully – preserve capital in down markets. But in up markets like 2010, hedge funds often make a lower return than the index.
Even then hedge fund strategies can have advantages in certain markets. In Europe, after the turbulence caused by debt problems in Greece, Ireland and Spain, the MSCI Europe Index ended the year up a mere 0.4%. By contrast, OZ Europe Master Fund gained 7.23%.
Tags: Daniel Och, MSCI All Country World Market Index, MSCI Europe Index
HedgeFundSmarts 
July 5, 2011 at 10:07 pm
[…] Mr. Och bought Och-Ziff stock after the crisis drove down the market. In addition, he gets a lot of equity as compensation. He holds some of the stock via trusts he’s established for his family. His stock holding can be seen as a good thing, evidence of his confidence in the business and the right kind of incentive. And on the whole, he has done well by investors in the funds. […]
April 3, 2012 at 4:59 pm
[…] I did a similar comparison more than a year ago, I added that this was not a valid way to assess a fund— you have to look at performance over […]