Mutual Funds and ETF Growth

Volatile markets have impacted even the best of investors. Last week we heard that Warren Buffett had his worst first half of a year in 19 years, and news out Tuesday shows that the hedge fund industry didn’t fare much better.

According to a report in Bloomberg:

Hedge funds declined by an average 0.7 percent in June, bringing the year-to-date loss to 0.75 percent, data compiled by Hedge Fund Research Inc. show. It’s the worst start to a year since the Chicago-based firm began tracking returns in 1990.

While hedge fund investors lamented the lack of volatility in markets for the last few years, they finally got their wish and, on average, weren’t able to deal with the high level of volatility.

But before we jump on the anti-hedge fund bandwagon, it’s important to note that the average equity hedge fund lost about 3.3% during the first half of the year. That thoroughly crushes the S&P 500 which dropped 19% from the October peak. This actually means that the hedge funds are doing what they are supposed to do and be a hedge against falling markets. To often recently hedge funds have become correlated to the market, exactly what they shouldn’t be.

It will be interesting to see the numbers from the mutual industry as well. If actively managed mutual funds also manage to beat the market, it may help slow down the explosive growth of the ETF industry. With investors constantly being told to simply buy and hold ETFs, double-digit under-performance within traditional ETFs has burned investors.  This may cause investors to revert to more actively managed accounts.

After all, how many buy and hold investors wish that they would have only lost 3.3% so far this year?

Disclosure: The author’s fund has no position in any stock mentioned as of July 10, 2008.