Its no secret by now that hedge funds largely failed
their investors last year, dropping about 5.26 percent on
average, according to Hedge Fund Research.
Perhaps more interesting, however, is how concentrated this
lousy performance was last year.
HFR found that the gap between the group of top performers
and worst performers was its narrowest in years.
The hedge fund scorekeeper points out in a detailed analysis
of 2011 performance that hedge fund dispersion in 2011 shrunk
to its lowest level since 2006.
What exactly does this mean? The Chicago firm breaks
into 10 groups the performance of the funds that report
to its database.
It found that its worst-performing decile lost 30.7 percent
in 2011 while the best-performing decile generated a 19.5
percent return. This works out to a dispersion the
difference between the best and worst performing deciles
of slightly over 50 percent.
HFR says this is down from nearly 58 percent in 2010 and
over 100 percent in both 2008 and 2009.
Whats more, it found that the top decile gain of 19.5
percent in 2011 was the lowest average performance for the
best-performing group since HFR began keeping score in 2000.
The next worst average gain among the best-performing decile
was 39.2 percent in 2002.
I never saw it quite like this, says Kenneth
Heinz, president of HFR.
Of course investors in the top funds are not complaining.
There just werent that many of them, especially those
outliers that beat the average performance of the top
There were only a handful of exceptions at the high end,
including Chase Colemans Tiger Global, who was up 45
percent; Jim Simons Renaissance Institutional Equities
Funds (RIEF), up about 34 percent; and Ray Dalios Pure
Alpha II, one of the funds managed by Dalio himself, up 25.3
Why was this dispersion so narrow? Heinz has several
theories, but the overriding factor was lack of conviction
Even the most bullish investors still pulled their
optimistic punches in 2011, fearing a slew of macro events,
such as a default and financial meltdown in Europe and further
deterioration of banks in the U.S., to name just two.
Macro risk overwhelmed fundamental analysis, Heinz
explains, which kept mean reversion from
Even managers who in the past have demonstrated willingness
to be out in front of shifting market trends were much less
daring last year, like Appaloosas David Tepper.
This year, so far, looks to be shaping up differently. Many
of the funds among last years worst performers were
bullish entering this year and are off to great starts,
including Lee Ainslies Maverick Fund, which was up 7.5
percent through February 24 and Mark Kingdons M. Kingdon
Offshore, up more than 10 percent through February 24.
The recent rally will probably further divide the bearish
and cautious from the bullish when March data is released in a
few weeks. Says Heinz: A lot of people who held losing
positions were committed to their trades and are now headed the
And presumably they are leaving the cautious hedge fund
managers way behind.