What Do You Think About the S&P 500 as a Benchmark Now?

The January 2018 results for aggregate hedge fund performance have been published. According to HFR, the industry showed a 2.8 percent gain. In contrast, the S&P 500 gained 5.7 percent in January before plummeting in the wake of February’s correction. Year-to-date gains for the S&P 500 as of February 16 stood at 2.19 percent, 61 basis points short of hedge fund aggregate gains in January alone.

The S&P 500 as a Benchmark

Many in the financial media benchmark hedge fund performance by making comparisons to the S&P 500. The recent correction has demonstrated, among other things, the folly of using this index to benchmark hedge funds.

From the S&P’s high-water mark on January 26 to its low on February 8, the index was underwater by as much as 11.84 percent. However, that pullback has been trimmed substantially and it is with baited breath that we await HFR’s February result for average hedge fund returns.

The markets continue to rebound and log impressive gains signaling that correction lows have come and gone. Interestingly, there is a dearth of media comparisons between January’s hedge fund result and the current state of the S&P 500. Apparently, such comparisons are only offered in scenarios that make the industry look bad.

If Not the S&P 500…

There is no consensus on the appropriate benchmark for hedge fund performance. However, it is clear that the benchmark should not be the S&P 500. Moreover, it is equally unwise for any investor to put too much weight on an aggregate result, such as those proffered by HFR, Eurekahedge, Prequin and a host of others.

This is not in any way meant to disparage these providers. Rather, it is to point out that such indices are built on the aggregate of individual hedge fund performance results, and they reflect the measurement biases of these funds. More to the point, they fail to illuminate the diversity of individual hedge fund performance characteristics.

Until a benchmark consensus is reached, the hedge fund industry will likely continue to suffer the apples-to-oranges comparison the media makes with the S&P 500.

What about Hedge Fund Jobs

If recent market events signal a return of volatility, hedge funds are likely step-up their search for talented stock pickers and those possessing such skills will see demand for their talents on the upswing.

The potential of Federal Open Market Committee rate hikes beyond those forecast cannot be ignored as a factor for increased volatility. If the FOMC is forced to raise rates to cool inflation, volatility will surely increase.

Traditionally, volatility has been the hedge fund industry’s best friend, providing the industry the opportunity to do what it does best—hedge! Volatility will be a persuasive force, encouraging hedge fund investment. The resulting positive cash flows will be accompanied by an increased demand for hedge fund professionals.

Now, the stars seem to be aligned to favor employment in the hedge fund industry, particularly for those with proven stock picking skills.

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