Hedge funds disappoint as shares roar on

Michael Bow
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LY hedge funds failed to keep pace with run of the mill stock funds last year, as equity markets proved more profitable than the best performing hedge strategies on average, data shows.

Statistics from the EDHEC Risk Alternatives Index show the most profitable hedge fund strategies for investors trailed US equity market returns by almost three percentage points on average in 2012.

Distressed securities hedge funds – which buy discounted bits of bankrupt firms and sell them for a profit – performed best over the 12 months, delivering a 13.2 per cent return. Emerging market strategies were the second best, giving a 9.9 per cent return in 2012.

But both were outshone by the S&P 500 equity index of the top US companies, which logged a 16 per cent return last year.

Two of the most prominent strategies, short selling and CTA global, also performed the worst in 2012, with returns of -19.3 per cent and -2.3 per cent respectively, the data shows.

The lack of performance is set to unsettle investors ploughing money into expensive hedge funds expecting returns above that of conventional equities and bonds.

Hedge fund fees are normally more expensive than tracker funds, with a two per cent management fee and a 20 per cent cut of profits versus 0.5 per cent for a tracker.

Despite the poor performance and costly fee structures, the hedge fund industry again added to the amount of cash it enticed last year, according to data from Hedge Fund Research.

Investors ploughed an additional $3.4bn (£2.86bn) into hedge fund strategies in the fourth quarter of 2012, taking total inflows for the year $34.4bn, the figures show.

Figures for December from EDHEC show event driven funds improved most significantly over the month, returning close to two per cent versus 0.8 per cent for November 2012.