Hedge fund managers are having a hard time making a buck this year, especially one that hasn't been fueled by a whole lot of market beta.
“It's been all about beta this year,” said hedge fund consultant Howard B. Eisen. “Hedge fund managers have been net long equities all year and in May, the market clocked them, but in September they rode the wave,” said Mr. Eisen, managing director, FletcherBennett Capital LLC, New York.
Hedge fund returns were particularly strong in September, with major indexes turning in their highest monthly returns since May 2009, though sources said the surge was driven by extremely strong equity markets. Still, domestic and global equity market returns were even stronger, with the Standard & Poor's 500 index returning 8.92% and the Morgan Stanley Capital International World index at 9.6%, leaving the best-performing hedge fund index, the Barclay Hedge Fund index, lagging at 3.57% for the month.
Over the first nine months of the year, however, the 5.2% return of the Barclay index surged well ahead of the 3.91% return of the S&P 500 and the 4.1% return of the MSCI World.
“It has been a challenging year for hedge funds. They have struggled to generate alpha in an environment of high correlation and high volatility. That said, hedge funds are still outperforming equity markets year to date,” Lee Hennessee, managing principal, Hennessee Group LLC, New York, said in a news release.
“When everyone is buying and selling at the same time, it's extremely hard to make money,” said one hedge fund-of-funds manager who asked not to be named. “About the best you can expect from long/short equity managers, for example, is a ride on market beta. There's just not much dispersion between the best and worst performing stocks — everything is being rewarded or punished equally — and not much dispersion between long/short equity managers,” said the source.
Industry sources said institutional investors could be pleased about hedge fund managers' strong positive year-to-date returns but likely will not be happy to pay high management fees of 2% and performance fees of 20% for returns that are so closely tied to the performance of global equity markets.
Whether they are net long equities or not, equity and multistrategy hedge fund managers were plagued by persistent, sweeping macro trends that significantly raised correlations between individual stocks and between stock markets worldwide.
Those global macro factors — including currency movements, monetary and fiscal policy, sovereign debt problems, stagnant economic growth and government quantitative easing — have spooked investors to buy and sell en masse throughout the first three quarters, said market observers.
Those big-picture reactions have led to “huge correlations between not only individual securities, but also between different markets,” said veteran multistrategy hedge fund manager James G. Dinan, chairman, CEO and founder of York Capital Management Global Advisors LLC, New York.
York Capital managed about $14.1 billion as of Sept. 30.