Hedge fund index returns lag major markets in quarter, half

Updated July 15

Returns of hedge fund indexes in the second quarter and the first six months of the year significantly trailed those of major market indexes.

Year-to-date returns of hedge fund indexes as of June 30 were flat to moderately positive. The Dow Jones Credit Suisse Hedge Fund index returned 1.65%, followed by the Hennessee Hedge Fund index, 1.45%, followed by Barclay Hedge Fund index, an estimated 1.01%; HFRI Fund Weighted Composite index, 0.76%; Greenwich Global Hedge Fund index, 0.4%; and Eurekahedge Hedge Fund index, 0.24%.

Hedge funds of funds didn't have an easy time for the first six months of the year, with returns of -0.54% (estimated) for the Barclay Hedge Fund of Funds index, -0.45% for the HFRI Fund of Funds Composite index, and -0.72% for the Eurekahedge Fund of Funds index for the six months ended June 30.

By contrast, the S&P 500 index was up 6.02% for the six-month period ended June 30 and the MSCI World index return was 5.62%. The Barclays Aggregate Bond index was up 2.72% for the same period.

“The ‘risk on, risk off' theme continues to dominate risk assets, as stocks, currencies and commodities are moving in response to macro events,” said Charles Gradante, co-founder of Hennessee Group, which maintains the Hennessee Hedge Fund index.

“Concerns about the U.S. and Chinese economies, oil prices, and sovereign debt issues in Greece are driving markets and creating a difficult investment climate. This year has been extremely challenging for hedge funds. Thus far this year, hedge funds are underperforming as they attempt to manage volatility and protect capital against losses,” Mr. Gradante said.

Unlike the first quarter of 2011, when hedge fund index returns were encouragingly positive and funds-of-funds returns were flat, hedge funds suffered more widespread performance problems in the second quarter.

While the Eurekahedge Hedge Fund index was up a slight 0.71% in the second quarter, all other major hedge fund indexes were in the red, with the worst return coming from the Greenwich Global Hedge Fund index at -1.1%, followed by the HFRI Fund Weighted Composite index, -0.94%; Hennessee Hedge Fund index, -0.64%; and Dow Jones Credit Suisse Hedge Fund index, -0.55%.

The only second-quarter hedge funds-of-funds index return that could be obtained was for the HFRI Fund of Funds Composite index, which was down 1.32%.

In the second quarter, the S&P 500 index returned 0.10%; the MSCI World, 0.66%; and the Barclays Aggregate Bond index, 2.29%.

May and June were particularly bad months for hedge funds, with the HFRI Fund Weighted Composite index declining 1.22% in June, the largest decline since May 2010, according to a Hedge Fund Research news release. The index dropped 1.14% in May, but was up 1.43% in April. The HFRI Fund Weighted Composite index returned 1.6% in the first quarter.

According to HFR's release, hedge funds surrendered their first-quarter gains in the second quarter, “with weakness concentrated in macro strategies.” The HFRI Macro (Total) index declined 2.15% in the first six months of this year.