Hedge funds began 2015 coming off their sixth-straight year of trailing U.S. stocks (as measured by the S&P 500 Index) by significant margins. And for the 10-year period ending 2014, one that included the worst bear market in the post-Depression era, the HFRX Global Hedge Fund Index returned just 0.7% per year, underperforming every single major equity and bond asset class.
Unfortunately for hedge fund investors, that streak has continued into a seventh year, as the HFRX Global Hedge Fund Index lost 3.6% in 2015, underperforming the S&P 500 Index by 5.0 percentage points.
The following table shows the returns last year for various equity and fixed-income indexes:
|2015 Return (%)|
|HFRX Global Hedge Fund Index||-3.6|
|MSCI US Small Cap 1750 (gross dividends)||-4.1|
|MSCI US Prime Market Value (gross dividends)||-1.8|
|MSCI US Small Cap Value (gross dividends)||-5.1|
|Dow Jones Select REIT||4.5|
|MSCI EAFE (net dividends)||-0.8|
|MSCI EAFE Small Cap (net dividends)||9.6|
|MSCI EAFE Small Value (net dividends)||5.2|
|MSCI EAFE Value (net dividends)||-5.7|
|MSCI Emerging Markets (net dividends)||-14.9|
|Merrill Lynch One-Year Treasury Note||0.2|
|Five-Year Treasury Notes||1.7|
|20-Year Treasury Bonds||-0.1|
As you can see, the HFRX hedge fund index underperformed six of the 10 major equity asset classes, as well as each of the three bond indexes. We can, however, go a step further and determine how hedge funds performed against a globally diversified portfolio.
An all-equity portfolio—allocated 50% internationally, 50% domestically and assigning an equal weighting of 10% to each of the 10 equity indexes referenced in the above tables—would have returned -1.2%, outperforming the hedge fund index by 2.4 percentage points.
Another comparison we can make is to a typical balanced portfolio of 60% equities/40% bonds. Using the same weighting methodology as above for the equity allocation, the portfolio would have returned -0.6% using one-year Treasurys, 0.0% using five-year Treasurys and -0.8% using long-term Treasurys. Each of the three would have outperformed the hedge fund index.