Swedroe: Hedge Funds Win With A Draw

October 19, 2015

The third quarter of 2015 brought hedge funds a very small amount of relief from their historically poor performance.

Keep in mind, however, that hedge funds entered January 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.

Despite their poor performance over the past decade, the latest data show that investors continue to pour money into hedge funds, with total assets under management approaching $3 trillion. What's particularly puzzling is that we don't see this same trend when we look at the fund flows for actively managed mutual funds.

Active Mutual Fund Outflows

While, in aggregate, actively managed funds persistently underperform, investors are taking notice and acting. For example, Morningstar reported that over the one-year period through early December 2014, roughly $92 billion in assets left actively managed U.S. equity funds, while about $160 billion in new inflows went into passively managed U.S. equity products—both traditional index funds and ETFs.

The table below shows the returns of the HFRX Global Hedge Fund Index for the first nine months of 2015, as well as the 10-year period from 2005 through 2014. It also shows the returns of major equity asset classes and of 1-, 5- and 20-year Treasurys.

Year-to-Date Return (%) January-September 2015 Annualized Return (%) 2005-2014
HFRX Global Hedge Fund Index -3.1 0.7
Domestic Indexes
S&P 500 Index -5.3 7.7
MSCI U.S. Small Cap 1750 Index (gross dividends) -7.0 9.0
MSCI U.S. Prime Market Value Index (gross dividends) -7.9 7.2
MSCI U.S. Small Cap Value Index (gross dividends) -8.1 7.9
Dow Jones U.S. Select REIT Index -2.8 8.1
International Indexes
MSCI EAFE Index (net dividends) -5.3 4.4
MSCI EAFE Small Cap Index (net dividends) 2.6 6.0
MSCI EAFE Small Value Index (net dividends) 0.4 6.4
MSCI EAFE Value Index (net dividends) -8.1 3.9
MSCI Emerging Markets Index (net dividends) -15.5 8.4
Fixed Income
Bank of America Merrill Lynch One-Year Treasury Note Index 0.3 2.0
Five-Year U.S. Treasury Notes 4.0 4.5
20-Year U.S. Treasury Bonds 0.1 7.5

Find your next ETF

Reset All