Back in January, Hedge Fund Research reported that hedge funds gained “+8.5 percent, the best calendar year performance since 2013[.]” Equity funds returned “+13.2 percent, the strongest calendar year since the Index returned +14.3 percent in 2013.”
We scratch our heads a bit at this. After all, our S&P500 Index Funds earned over 20 percent last year, and we had full-time jobs doing other things. Let me say that again: the average equity hedge fund earned 13.2%; my three grade school kids put their 529s in the S&P500 and didn’t think about it again and crushed those funds.
We learn from Reuters that “Greenlight Capital, run by David Einhorn, ended the year with a 2 percent gain[.]” Wait, seriously? (note: he was down more than 5% this January alone, proving that being a really bad hedge fund manager is still a better gig than doing most anything else.)
Crain’s Chicago Business says “Citadel, the biggest hedge fund company in Chicago, delivered returns of about 13 percent to investors in its flagship funds last year—not bad by hedge fund standards, though still far short of the S&P 500 Index’s explosive 19 percent gain for 2017.” (the Crain’s number doesn’t include index dividends, making Citadel’s return look better by comparison than it was.)
Let’s put it a different way. Last year, investors in Greenlight’s funds could have put $10 million into the Vanguard S&P500 on December 30, 2017, then sold it on January 27th, 2018 (less than a month) and sat on the money – I mean, literally sitting on the pile of cash – and made more than Greenlight made for them.
Citadel investors would have waited longer, until October 16th, 2017, but then could have sold and sat on their money as well, perhaps just hanging out like this kid and playing Dueling Banjos (I think of Ned Beatty as the poor hedge fund investor).
Oh, and they would have paid expenses of 0.04% instead of 2% (or more!) and 20%.
This is no new phenomenon. A nice article on qz.com (so much great content there) has this great graph:
Hedge fund underperformance relative to the S&P500 is amazing, really. I mean, in an efficient market, you’d think it would be really tough to do this badly (but see my article, Why Indexing Works for the explanation).
Oh, and don’t take too much solace from the graph above if you think bad times are coming. In 2008, Citadel – managed by one of the smartest people I’ve ever met – lost nearly 60%.
If you are investing in hedge funds that aren’t performing, you may be the Dumb Money (tip of the hat to Jeff Foxworthy).