Market Beats Hedge Fund; Now What?

Chidem Kurdas

Last year hedge funds on the whole did not perform well. Nevertheless, investors appear to be interested in putting more money into hedge funds. In part this is because most investors do not invest in hedge funds as a whole but rather with particular managers. A portfolio of thoughtfully selected managers can make a lot more than the industry as a whole.

Nevertheless, there are times when long established and highly regarded managers trail the market.  Case in point: Daniel Och, whose Och-Ziff Master Fund made 4.52 % through March this year. Set against broad-gauge index investments, that is disappointing. For instance, the Vanguard Total International Stock Index Fund, which tracks the MSCI All Country World Investable Market Index, made 13% year to date.

When 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 cycles.  Of relevance to investors interested in reducing their Black Swan crisis risk is the 2008 performance. In the crisis, world markets lost more than 50%; OZ Master Fund lost a comparatively less painful 15%.  No doubt this continues to impress some investors—that’s why Och-Ziff has $29.5 billion in assets.

But the fact remains that when the stock market is strong, hedge funds tend to underperform. Their comparative advantage shows up in bearish markets.

So, if you expect stocks to sky rocket, there’s no point putting money in hedge funds; you’re better off with an equity index, which will catch the big upside and has the additional great virtue of being cheap. On the other hand, if you don’t have confidence in stocks, then you need to look for robust alternatives, including hedge funds.

Most of us aren’t sure. Institutions are going for a combination of index and active investments such as hedge funds. That looks to be the best bet.

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