When hedge fund investors next week start learning about how their funds fared in the third quarter, they most likely will be satisfied that they made a decent amount of money for a change, given the strong summer rally.
Others will just be relieved that their fund rose back above its high-water mark (HWM). For according to HFR, as of June 2012, 43 percent of the funds that comprise its broad-based HFRI Fund Weighted Composite Index had reached their respective high-water marks over the trailing 12 months.
In effect, this means just 43 percent of hedge funds were at their high-water mark around that time. But HFR cautions that it does not report a HWM figure at a single point in time since it would be prone to a distortion potentially created by a small decline in performance to conclude the reporting period, with a large number of funds falling only slightly off of their HWM.
In any case, the 43 percent figure is the lowest since HFR has been tracking this trend since 2003. This compares with 88 percent of hedge funds that were at their high-water mark at year-end 2007, 56.4 percent at the end of 2008 when the average fund was down more than 20 percent and 50.4 percent in 2009, the first partial recovery year.
It will come up in the third quarter, predicts HFR president Ken Heinz. The major reason he is confident: While the third quarter of this year is shaping up to be a pretty profitable one, the average fund lost 6.8 percent in the third quarter of 2011. So, he figures a fair amount of funds should be able to rise above the all-important break-even level once that lousy 2011 period falls off.
In any case, Heinz attributes the small number of funds that hit their high-water mark in the most recent 12-month period to the narrowing of the dispersion of hedge fund results.
He has calculated that the average performance among hedge funds in the top decile in 2011 was up just 19.5 percent. This was much worse than this elite group fared in any other year since he began calculating this data in 2000.
In the trailing 12-month period, the top 10 percent were up just 18.4 percent.
In 2002, the top 10 percent of hedge fund performers were up, on average, more than 39 percent. Even in woeful 2008 the funds in the top decile made 41 percent that year even though a large number of funds finished down by double-digits.
How does this explain the low number of funds that reached their high-water mark in the most recent 12 months? The more upside outliers, the more likely people hit their high-water mark, Heinz explains.