Sour sixteen, a pre-Zombie update | FT Alphaville

Sour sixteen, a pre-Zombie update

Bloomberg Markets Magazine has published its annual list of investment returns for large hedge funds. Kudos to Larry Robbins of Glenview for winning the 2013 performance roulette with an 84 per cent return.

An astonishing profit, but representative of the hedge fund industry only as the rare exception. Just 16 hedge funds managing more than $1bn were ahead of the Vanguard 500 index fund as of the end of October, according to the article.

Sure, not every large hedge fund is trying to beat the US benchmark. But to have only 16 large funds in the entire hedge fund industry do so …

Maybe we are too harsh. How about we compare the best of the hedge fund industry to the simplest of dumb (hedged) portfolios instead? If you put $60 into the Vanguard 500 index fund at the start of last year, and $40 into its Total Bond fund, you finished October with $117.92.

Oh dear, only 36 hedge funds managing more than $1bn outpaced that simple portfolio.

Or perhaps we should run it back five years, the average life of a hedge fund which makes it past its first year. (How about the top 100 hedge funds on that basis, please Bloomberg?)

Stick with that simple portfolio allocated 60 per cent stocks and 40 per cent bonds with Vanguard, rebalanced at the start of each year, and compare it with the HFRI average for fund weighted returns.

Now, that HFR number for 2013 is only through the end of November. Maybe the industry knocked it out of the park in December, but overall the verdict is a passive investment five-year total return of 81 per cent, versus 44 per cent for the hedge fund industry.

So, a question to institutional investors everywhere: why are you invested in hedge funds?

Related Links:
Smart enough to avoid a zombie bite? – FT Alphaville
Three things long/short hedge funds cannot do (well) – FT Alphaville
Two and twenty is long dead and buried – FT Alphaville
Zombies are the wrong kind of mean – FT Alphaville