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Here’s a Different View of Hedge Fund Performance

Hedge funds haven’t outperformed popular benchmarks by this much since the global financial crisis.

Many large hedge fund managers had a brutal spring. Tiger Global lost 14 percent in May amid continuing sell-offs in technology. Pershing Square was down 9.5 percent after its bet on Netflix led to an 8.1 percent loss in April. Melvin Capital's shut down led some investors to worry if it would trigger a wave of hedge fund closures.

Even though these names have dominated headlines, raising concerns about hedge fund performance in general this year, a deep dive into data on institutional funds tells a different story. PivotalPath’s composite index, which reflects the performance of 10 broad strategies, was down only 0.8 percent in May and about 1 percent for the year. Even more telling, 47 percent of funds generated positive returns year-to-date, and 62 percent have either gained or lost less than 1 percent, according to data that the research and data firm provided to Institutional Investor

“Historically, when big names lose a lot of money, they are often the poster children for the rest of the industry,” said Jon Caplis, CEO of PivotalPath. “In this case, they are quite the outliers.” In fact, the hedge fund performance gap has widened over the years. 

Last month, managed futures gained 14 percent and global macro was up 10 percent. Volatility trading and equity quant were up by 9 percent and 4 percent, respectively, according to PivotalPath. Meanwhile, the S&P 500, Russell 2000, and Nasdaq were down 13 percent, 17 percent, and 23 percent, respectively, through May.

Only 8 percent of all hedge funds have lost over 25 percent since the start of the year, according to data from PivotalPath. These funds are concentrated in a handful of strategies like equity sector, equity diversified, and event-driven. Within the equity sector, which lost 15 percent overall year-to-date, funds focused on healthcare stocks and technology, media, and telecommunications companies have experienced the deepest losses. 

For funds that have been losing money, Caplis said it’s not a surprise given the pressure in the sectors that they focus on. For example, some hedge funds have made huge returns for years with their investments in software-as-a-service companies, Chinese internet stocks, and gaming companies. But these sectors have been severely challenged since the start of the year, making losses inevitable. “All these subsectors are down anywhere from 25 to 60 percent,” according to Caplis. 

Even as some big funds suffered losses in the market downturn, PivotalPath’s composite index outperformed the S&P 500 by 12 percent from January to May. “You would have to back to 2008 to find a larger outperformance in a calendar year,” Caplis said.

Caplis added that hedge funds have been delivering on their promises to investors by mitigating drawdowns, adding alpha, and improving Sharpe ratios. For example, if investors allocated 20 percent of assets to hedge funds (represented by PivotalPath’s Composite index) to a portfolio with 60 percent in stocks and 40 percent in bonds in early 2020, the Sharpe ratio would have increased from 0.4 to 0.6, according to Caplis. At the same time, the hedge fund allocation would have added 2 percent in annualized alpha and reduced drawdowns from 13 percent to below 11 percent. “These are the type of things that really matter to investors. Hedge funds are continuing to do what investor expect them to do,” he said.  

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