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Larry Swedroe
Index Investor Corner

Hedge Funds Fall Flat—Again


One of the truly amazing phenomena is the continued popularity of hedge funds, especially among high net worth investors. Despite the historical evidence on their persistently poor performance—as presented in my book “The Quest for Alpha”—hedge funds continue to attract great attention.

So, instead of hype and hope, we continue to provide you with the evidence. And, as Yogi Berra would say: It’s déjà vu all over again.

The three quarters of 2013 didn’t bring much relief from their historically poor performance. The table below presents the returns of the HFRX Global Hedge Fund Index and compares it with the performance of various equity and fixed-income indexes, both for the period 2003-2012, and also for the first nine months of 2013.

The HFRX Global Index follows an asset-weighted approach to accurately reflect the changing opportunities in the hedge fund.

Total Return
Jan-Sept 2013
HFRX Global Hedge Fund Index 1.6 4.3
S&P 500 Index 7.1 19.8
MSCI US Small Cap 1750 Index (gross div.) 11.0 27.5
MSCI US Prime Market Value Index (gross div.) 7.3 19.8
MSCI US Small Cap Value Index (gross div.) 10.3 22.6
Dow Jones US Select REIT Index 11.5 2.3
MSCI EAFE Index (net div.) 8.2 16.4
MSCI EAFE Small Cap Index (net div.) 11.9 22.1
MSCI EAFE Value Index (net div.) 12.3 15.7
MSCI EAFE Small Value Index (net div.) 8.6 23.6
MSCI Emerging Markets Index (net div.) 16.1 -4.4
BofA Merrill Lynch 1-Year US Treasury Note Index 2.2 0.2
Five-Year US Treasury Notes 4.6 -1.1
Long-Term Government Bonds 7.5 -8.9

Over the first nine months of 2013, the HFRX index returned 4.3 percent. It underperformed all but two of the 10 major equity asset classes. The HFRX managed to outperform the Dow Jones US Select REIT Index by 2 percentage points and the MSCI Emerging Markets Index by 8.7 percentage points. However, it underperformed the MSCI US Small Cap index by 23.1 percentage points. And it underperformed a total of six of the equity indexes by at least 15 percentage points.




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