Hedge funds, in the aggregate, turned in yet another lackluster performance in November, 2018, which resulted in an HFR weighted composite index of -0.16 percent, which brings year-to-date performance to -2.00 percent—a hard pill for the industry (and its investors) to swallow.
Also worth noting, is the fact that as of Friday, December 7, 2018, the S&P 500 went negative for the year, having lost all its year-to-date gains and then some. If misery loves company, hedge funds have found their cupid.
Stock Markets as Benchmarks
While this may be the ideal moment in time for hedge funds to make comparisons to the S&P 500 as something of a benchmark, most hedge fund professionals agree that the S&P 500 or the Dow Jones Industrial Average (DJIA) have no value as benchmarks for hedge fund performance because hedge funds are supposed to be uncorrelated. Why? Because they hedge! This necessarily mutes their relative performance in a bull market or rally, which makes any comparisons meaningless.
Moreover, hundreds of hedge funds have not a single stock in their portfolios. Hedge funds have multiple strategies, many of which are based upon investments in currencies, bonds, merger arbitrage, commodities, and other alternative assets that do not revolve around the stock markets.
How meaningful is a comparison to the S&P 500 or DJIA for hedge fund firms employing these strategies?
What Hedge Funds Should Do
These times cry out for the hedge fund industry to develop a meaningful metric that better informs current and potential investors, and silence those that would compare hedge fund performance to the S&P 500 or the DJIA, unhelpful benchmarks at best and downright misleading at worst.
HFRI, Hedge Fund Research Indices, although a respected industry benchmark, is not a satisfactory measure of a given hedge fund’s performance, nor, in fairness, is it intended to be.
For example, pension funds need an absolute return to pay their pensioners. Pension funds have fixed obligations which they must meet. It doesn’t help them much to know that their hedge fund is losing less money than the aggregate return of other hedge funds. In short, investors need to know if a hedge fund can meet their goals over a given time frame, not how it performed compared to an aggregate of funds, the S&P 500, or the DJIA.
The Problem
The boundary between a hedge fund and an active fund manager is blurred, at best. As a result, it might be accurate to say that no definitive hedge fund industry exists. Absent a distinct hedge fund industry, it will be extremely difficult to achieve an industry accepted method or metric against which performance may be measured. This gives rise to another issue. If there is no unambiguous definition of a hedge fund, it is impossible to ascertain the assets being managed at any particular point in time.
What about Hedge Fund Jobs?
Here is the point. The ability to benchmark hedge fund performance is, in many ways, just as important to job seekers as it is for potential investors. Do you want to begin your career at Burger King or Morton’s Steakhouse?
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