Swedroe: Hedge Funds Continue To Fail

The first half of 2015 again brought hedge funds little in the way of relief from their historically poor performance.

Hedge funds entered 2015 coming off their sixth-straight year of trailing U.S. stocks by significant margins. And for the 10-year period from 2005 through 2014—which includes the worst bear market in the post-Depression era—the HFRX Global Hedge Fund Index returned just 0.7 percent per year, underperforming every single major equity and bond asset class.

The table below shows the returns of the HFRX Global Hedge Fund Index for the first six months of 2015, as well as the 10-year period from 2005 through 2014. It also shows returns for major equity asset classes and one-, five- and 20-year Treasurys. 

In the first six months of 2015, the HFRX Global Hedge Find Index returned 1.3 percent. Of the 10 major equity asset classes, it outperformed just four. As is our practice, we’ll compare that return with the performance of three standard 60 percent stock and 40 percent bond portfolios.

Hedge Funds Vs. 3 Portfolios

For their equity portion, each of the three portfolios we’ll consider weights equally the 10 stock indexes in the table above. That means each index represents 6 percent of the total portfolio, and that both domestic and international stocks each represent 30 percent of the total portfolio, or half the equity allocation.

For the fixed-income portion, our portfolios each use one of the three bond indexes below.

• Portfolio A uses one-year Treasury notes
• Portfolio B uses five-year Treasury notes
• Portfolio C uses 20-year Treasury bonds

Here are the results:

As you can see, the HFRX Global Hedge Fund Index managed to outperform Portfolio C, but underperformed A and B.

Despite this poor performance, the hedge fund industry continues to thrive as its assets under management set new records. Unfortunately, the evidence makes clear that investors in hedge funds haven’t fared as well as fund vendors or managers. The result is one of the more puzzling anomalies in finance—the continued growth of an industry that for a long time has delivered miserable results for investors.

The only explanation I can offer is that hedge fund investments represent the triumph of hype, hope and marketing over wisdom and experience. We’ll check back again with another look at hedge fund performance at the end of the third quarter.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.