Skip to main content

Sound Advice: August 10, 2022

A Good Year For Hedge Funds After Lagging Badly For A Decade   

Investing in a hedge fund may well spark an interesting conversation at a cocktail party, but a closer look at these high-end opportunities tells quite a story.  First, you have to be an accredited investor to join in.  For the typical hedge fund, that means a net worth of at least $1 million, exclusive of your primary residence, as well as an annual income over $200,000 if you’re single, or $300,000 if you’re married.

Then there’s the matter of fees.  The typical fee for a hedge fund investment is 2% of assets managed plus 20% of the profits each year.  That’s a high price to pay, but one would hope that the ostensibly super-bright people running these operations could generate returns that justify the cost.

The reality is that they have not.  Indeed, average hedge fund returns over the latest 10 years have been less than half those of the Standard & Poor’s 500 Index. For that matter, they have lagged behind in every one of the last 10 years.  Since 2012, even in the best four years, the hedge fund index rose no more than 11%. By comparison, S&P returns were double or triple the hedge fund average in their highest years.

This year, however, the hedge funds have done better, slipping only 6.8% through midyear while the leading stock indexes were off 20% or more.  Among the very best was Bridgewater Associates’ Pure Alpha II fund, which cranked out a gain of 32%.  This extraordinary performance was largely the result of a hefty short bet against more than two dozen European companies, following reports that economic growth in the Eurozone was slowing due to rising inflation. The situation on the Continent was further exacerbated by the energy crisis resulting from the conflict in Ukraine. 

Credit where credit is due, but after an extensive span of disappointing returns, it cannot come as much of a surprise that there’s a rare occasion when one of their strategies finally works.

In 2020, Pure Alpha II fell 12.6%, while the S&P rose 18.4%.  In 2021, the fund was up 8% while the stock index was up nearly 27%.  When you add in the rest of the decade’s numbers and then subtract the hefty fees payable, it becomes clear that Pure Alpha II was not exactly a nonstop standout.

Yes, the fund’s European short positions have paid off handsomely so far in 2022, but one good year for Pure Alpha II or the rest of the hedge fund universe does not make up for many years of failing to deliver the goods.

If you’re still interested, be aware that this fund requires a minimum investment of $10 million and investable assets of $7.5 billion.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

 203-222-9370

 www.soundasset.com

www.soundasset.blogspot.com

 

Any questions?  Please contact me at nrwayne@soundasset.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...
Post a Comment
Read more

Sound Advice: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...
Post a Comment
Read more

Sound Advice: June 17, 2020

Rock and a Hard Place Regardless of your age, impressions from childhood linger.  As the first days of summer approach, we all remember the feeling that accompanied the end of a school year.  Yet as much as many of us would like to believe we again have the summertime freedom to do as we wish, the reality is quite the opposite. Although months of confinement and limitations on social interaction have increased our personal discomfort and severely impacted the business community, our current situation is not analogous to the end of any school year.  It’s quite the opposite. There is every reason to continue wearing face masks, social distancing, and avoiding close contact with others.  Nothing suggests that we can modify our behavior significantly or resume patterns of daily living we enjoyed only a few months ago. There are no meaningful advances in medical treatments.  At best, there are attempts to combine different approaches...
Post a Comment
Read more