This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why Hedge Funds Are Lagging

NEW YORK ( TheStreet) -- At a time when stocks are soaring, hedge funds have lagged.

In the past year, exchange-traded funds that aim to replicate hedge funds delivered modest results. IQ Hedge Multi-Strategy Tracker (QAI) returned 1.2%, compared to 13.9% for the S&P 500, according to Morningstar.

But the weak performance has not discouraged some investors. The IQ ETF recorded $132 million inflows in the past year, according to IndexUniverse.com. That is a sizable inflow for a fund with $343 million in assets. Other ETFs that have reported inflows include IQ Hedge Macro Tracker (MCRO) and ProShares Hedge Replication (HDG).

Like the ETFs, the hedge funds themselves have been reporting inflows. In 2012, hedge funds attracted $34 billion in assets, raising the industry's total capital to a record $2.3 trillion, according Hedge Fund Research.


What keeps attracting investors? Proponents say that hedge funds provide diversification. The funds can sell short and use other techniques that can limit losses in downturns. Because short selling can hurt results in bull markets, it is not surprising that the funds would trail lately. But critics argue that the spell of uninspiring results could indicate that the hedge fund industry has become bloated.

The stretch of poor performance is a recent development. During the 10 years that began in 2000, many hedge funds excelled. By limiting losses during the big downturns of the decade, hedge funds returned 6.4% annually, compared to a loss of 0.9% for the S&P 500, according to a study by Ineichen Research and Management. But since 2010, the picture has changed. While the S&P has returned 12.4% annually, hedge funds only delivered 4.3%.


The falloff of results has occurred at a time when the hedge fund industry has made dramatic changes. A decade ago, hedge funds catered primarily to wealthy individuals. Many investors came in search of the outsized returns that had been achieved by bold managers such as George Soros.

After suffering big losses in the turmoil of 2008, individuals began fleeing hedge funds and seeking safety in bonds. But institutions moved in the opposite direction, increasing their allocations to hedge funds. Pensions and endowments turned to hedge funds as a way to limit losses in downturns. According to a study by Preqin, institutions now account for 61% of assets in hedge funds, up from 45% in 2008.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
QAI $30.02 -0.13%
HDG $43.43 -0.17%
MCRO $25.70 0.07%
AAPL $131.49 -0.42%
FB $80.21 -0.42%

Markets

DOW 18,099.73 -63.26 -0.35%
S&P 500 2,117.43 -6.05 -0.28%
NASDAQ 5,090.5270 -16.0660 -0.31%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs