Hedge funds gain 6%-7% in 2012, but trail stock market indexes

Charles Gradante
Charles Gradante, managing principal, Hennessee Group: Equity hedge fund managers especially benefited in December.

Hedge fund returns exhibited marked improvement in 2012, climbing out of the red zone they sunk into in 2011.

The HFRI Fund Weighted Composite index returned a healthy 6.16% in calendar year 2012, vs. -5.25% in 2011, for example.

Returns of other major hedge fund indexes also were positive last year with the Hennessee Hedge Fund index producing 6.99%; Greenwich Global Hedge Fund index, 6.27%; Eurekahedge Hedge Fund index, 6.19%; and Dow Jones Credit Suisse Core Hedge Fund index, 3.38%.

The 7.32% aggregate hedge fund average return as of Dec. 31 for the funds in eVestment Alliance's database was well above the returns of any of the hedge fund indexes.

Hedge funds of funds also produced positive returns as well, with the HFRI Fund of Funds Composite index at 5.25% as of year-end 2012 vs. -5.72% for 2011.

“Hedge funds ended 2012 on a positive note, returning an average of 1.5% in December and 1.8% in the 4th quarter … (and) returns lagged broad equity markets for the year, but outperformed in the 4th quarter,” according to eVestment Alliance's December Hedge Fund Performance report.

The S&P 500 index, for example, declined -0.38% in the last quarter of 2012, compared to an average return for the three-month period of 1.84% for the hedge funds eVestment Alliance tracks.

Over the full year ended Dec. 31, however, major domestic and international indexes outperformed hedge funds by a wide margin, with the S&P 500 index returning 15.89%, the Russell 3000 index, 16.3%; and the MSCI ACWI, 16.62%.

Bond returns in 2012 were muted, by comparison, with the Barclays Capital U.S. Aggregate Total Return index ending the year at 4.22%.

Equity hedge fund managers especially benefited in December from “both increased exposure levels and alpha generation from security selection as high correlations continued to decline among stocks with attractive and unattractive valuations,” said Charles Gradante, managing principal, Hennessee Group, in a news release.

Hedge funds underperformed equity markets overall in 2012 “due to conservative positioning early on. During the first quarter, below-average exposures led to reduced up-market capture,” Mr. Gradante added.

Drilling down to the strategy level, eVestment Alliance reported that the five best-performing hedge fund groups on average last year were India, 20.5%; mortgages, 18.7%; health-care equity, 16.6%; financials equity, 15.6%; and China, 14.1%. The five hedge fund strategy groups with the worst average 2012 returns were technology and commodities, both at -2.1%; managed futures, -0.7%; energy, 0.9%; and foreign exchange, 2.2%.