Hedge Funds Underperforming, Yet Still Growing in New Assets

170428950 (1)Hedge funds remain somewhat of a mystery to much of the public. They are supposed to have absolute returns, but they do not always outperform their benchmarks. A new report from BarclayHedge and TrimTabs Investment Research is showing that the hedge fund industry had inflows of another $7.7 billion in June. The survey and the headline for this story indicates that funds may be underperforming the industry benchmark, but it needs to be understood that this is a broader survey that involves other classes of hedge funds rather than long-only equity funds.

The report showed asset growth of 0.3% in June. May's new asset inflows was counted as $19.1 billion, or about 0.8% of assets. The first half of the year has seen some $82.5 billion in new assets for hedge funds. This is some 3.8% of the total hedge funds' assets, and it was the best first half for inflows in the hedge fund industry going back to 2007.

What should stand out the most here is that the $82.5 billion in new assets in the first half of 2014 was against only $26.8 billion in new asset inflows in the first half of 2013. This means that the inflows for 2014 have been just over three-times that of 2013.

Hedge fund industry assets also rose to a six-year high of $2.35 trillion in June. The figure was based on data used from some 3,441 hedge funds. Another observation was that total hedge fund assets rose by 21% from the end of June in 2013. This was still about 3.6% lower than the all-time peak in hedge fund assets of $2.4 trillion back in June 2008.

What investors and fund managers all likely know is that some of the asset growth was from inflows of new capital, and also from the strong markets. The monthly TrimTabs/BarclayHedge Hedge Fund Flow Report showed that the hedge fund industry gained 1.4% in June. This may have been the best monthly performance in four months, but it was it was still less than the 2.1% gain in the S&P 500.

Another relative performance metric stood out as well: over the past 12 months, hedge funds returned 10.8% versus a gain of 24.6% in the S&P 500. As yet another reminder, this may not be a fair apples-to-apples comparison as this was a survey of hedge funds in general and not just the traditional long-only funds. Those long-only equity funds had the best returns over other classes in June with gains of 3.4% for the month — better than the 2.1% for the S&P 500. The worst sector was convertible arbitrage funds with a gain of only 0.4%.

The monthly TrimTabs/BarclayHedge Survey of Hedge Fund Managers showed an equal divide among hedge fund managers on their outlook of the short-term prospects for U.S. equities. It reported:

  • 37.2% of respondents were bullish on the S&P 500 over the next 30 days, while 34.6% were bearish.
  • Optimism on the U.S. Dollar Index hit a two-year high.
  • Bullish sentiment on gold hit a five-month high.
  • The proportion of managers expecting crude oil prices to rise dropped to the lowest level in six months.

While it is easy to just say that hedge funds were underperforming the S&P 500 Index, we would again stress that the TrimTabs/BarclayHedge survey is of all classes rather than just the long-only equity classes.

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