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 |
| Domestic Indexes | |
| S&P 500 | 1.4 |
| 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 |
| International Indexes | |
| 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 |
| Fixed Income | |
| 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.
