Swedroe: Hedge Funds Miss Mark

January 20, 2016

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.

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