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The Hedge Fund 'Slump' Continues

Mar. 16, 2019 5:00 AM ETSPY, VBTLX5 Comments
Louis Kokernak, CFA profile picture
Louis Kokernak, CFA


For the first time since 2009, the average hedge fund outperformed the S&P 500. Many enthusiasts within the space thus heralded 2018 as a turnaround year. At the same time, news stories focused on the implosions of well-known hedge fund managers. In my view, neither perception is accurate. It's important to step away from the immediacy of individual successes and failures in favor of longer-term composite data.

About two years ago, I argued that aggregated measures of hedge fund performance substantially lagged basic investment strategies. See The Case For Hedge Funds is Evaporating. Part of the argument rested on an inherent bias in the compilation of hedge fund returns. The participation of any hedge fund manager is voluntary. That tends to skew reported results in a positive direction.

Major hedge fund databases do their best to reduce reporting bias among their contributors. For example, most prohibit attempts by new entrants to backfill performance with positive results. Some biases remain stubborn, however.

Hedge funds are subject to a lot of churn. The high rate of turnover creates special problems for performance aggregators.

  • Over 15% of the hedge funds that were reporting performance to the Lipper Hedge Fund database stopped submitting their results during the Great Recession.
  • In 2018, one of the "best" years for hedge fund performance, about 1,300 closures occurred. That's about 19% of the nearly 7,000 funds tracked by hedge fund data provider BarclayHedge.

When there is high turnover in a statistical sample, it is reasonable to expect two things. Failing hedge funds are not attaching priority to reporting their results to third-party databases. Secondly, those missing results are not very good.

Are there measures of performance that are less subject to bias? Perhaps. There is a cohort of investment products within the hedge fund universe known as Funds of

This article was written by

Louis Kokernak, CFA profile picture
I have been a fee only financial advisor since 2002 and am a Chartered Financial Analyst and Certified Financial Planner. The cornerstone of the life savings strategy at Haven Financial Advisors is the investment in multiple asset classes with low cost and low turnover.The investment process is transparent.There are no "black box" funds or sudden swings in risk taking.

Analyst’s Disclosure: I am/we are long SPY, VBTLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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