It’s 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.
What’s 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 weren’t that many of them, especially those outliers that beat the average performance of the top decile.
There were only a handful of exceptions at the high end, including Chase Coleman’s Tiger Global, who was up 45 percent; Jim Simons’ Renaissance Institutional Equities Funds (RIEF), up about 34 percent; and Ray Dalio’s Pure Alpha II, one of the funds managed by Dalio himself, up 25.3 percent.
Why was this dispersion so narrow? Heinz has several theories, but the overriding factor was lack of conviction among managers.
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 occurring.”
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 Appaloosa’s David Tepper.
This year, so far, looks to be shaping up differently. Many of the funds among last year’s worst performers were bullish entering this year and are off to great starts, including Lee Ainslie’s Maverick Fund, which was up 7.5 percent through February 24 and Mark Kingdon’s 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 other way.”
And presumably they are leaving the cautious hedge fund managers way behind.
