Low hedge fund index returns in 2014 did little to dissuade investors from increasing their hedge fund portfolios and masked a hefty performance divergence among hedge fund managers and strategies.
The hedge fund industry last year endured widespread public criticism about disappointing returns relative to the Standard & Poor's 500 index and high fees.
Industry tracker Hedge Fund Research Inc., for example, reported that its flagship index, the HFRI Fund Weighted Composite returned 3.3% for the 12 months ended Dec. 31, compared to 9.1% in 2013 and 6.4% in 2012.
Other major hedge fund indexes reported similar aggregate returns from their databases for 2014, with the Preqin All-Strategies index at 3.8%; Barclay Hedge Fund index, 3.2%; and eVestment Hedge Fund Aggregate index, 2.8%.
The S&P 500, by contrast, was up 13.7% in 2014; the MSCI All-Country World index, 4.8%; and Barclays Capital U.S. Aggregate Bond index, 6%.
“It really was a better year than the numbers show, given that the equity market spent most of the year at record highs,” precisely the type of environment when many hedge fund managers become “conservatively positioned” and focused on downside protection, said Kenneth J. Heinz, president of Chicago-based HFR.
On an asset-weighted basis, the same universe of 2,200 hedge funds HFR tracked produced an aggregate return 200 basis points higher than the fund-weighted composite, Mr. Heinz said.
There were “powerful, significant differences” in returns between the largest hedge funds in the industry, those managing $15 billion or more, and the rest of the HFR universe, Mr. Heinz said.
“Experience played very well for some of the largest hedge fund managers who have been through markets like this before. What's more, those firms tend to be favored by institutional investors,” he said.