JayHedge's  Instablog

Send Message
Jay Singh is a finance enthusiast. Reading and blogging about finance in general and hedge funds in particular is both a passion and a professional way to find opportunities. Currently, Jay mainly advises on global private equity but previously managed publicly-traded instruments both for... More
  • 2012: A Resounding Turnaround Year For Hedge Funds 0 comments
    Jan 8, 2013 4:45 PM

    Figures often beguile me, particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: 'There are three kinds of lies: lies, damned lies, and statistics.
    - Mark Twain

    Our headline might come as a surprise considering the negative new year coverage of hedge funds. CNBC opined Loeb, Cooperman Stand Out in Horrid Year for Hedge Funds, Forbes proclaimed Investors Are Sticking With Hedge Funds Despite Another Down Year, and WSJ nailed it with Hedge Funds Again Prove a Laggard.

    According to WSJ, "Hedge funds on average gained an estimated 5.5% in 2012, according to industry-tracker HFR … In comparison, the Standard & Poor's 500-stock index gained 16% for the year on a total-return basis." Moreover, the average hedge fund lost 5% in 2011.

    Just using this information, we arrived at our headline as the average hedge fund (being up 5.5%) in 2012 outperformed the average hedge fund (being down 5%) in 2011 by 220% and that is indeed a resounding turnaround for the 2 trillion dollar industry! (If you look at Forbes headline it is downright wrong to say "Down Year" and CNBC claiming a "Horrid Year" is, well, a matter of opinion.)

    The article in WSJ further elaborates: "Despite a few outsize performers, hedge funds lagged behind broader markets for the fourth year in a row, the longest period of underperformance since 1998, according to industry tracker HFR." To prove its point, the article has a chart showing the underperformance since 2009, and also shows the last year of relative outperformance in 2008 (Hedge Funds -19% vs. S&P 500 -38%).

    So we did a simple calculation: An investor plops down $100 in the S&P 500 and another investor $100 in the HFR Hedge Fund Average in Jan 1, 2008. Who comes out ahead at the end of 2012?

    The hedge fund investor comes ahead by 99 cents (cannot make this stuff up).

    We realize there are subtleties (such as survivorship bias and risk-adjusted returns, to name a couple) that we have not taken into account that could favor the hedge funds or the market index. But our intention here is not to offer conclusive research, just show how misleading headlines can be (including ours?).

    For a more objective look at the winners (unfortunately that can mean in 2012 the likes of Baupost Group not being included) we recommend Bloomberg's 100 Top-Performing Large Hedge Funds. The returns are for the 10 months ending on October 31, 2012, and will be updated for the full 2012 in February 2013. Until then we recommend the writings of Mark Twain.

Back To JayHedge's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.