2015 emerged as one of the toughest years for the hedge fund industry, recording the highest number of liquidations since 2009. With 979 funds closing shop and 968 new launches, 2015 was the first year to see liquidations exceed new launches since 2009. Furthermore, Q4 2015 was the first quarter to experience net outflow of capital ($1.52 billion) since Q4 2011 (according to Hedge Fund Research, Inc.).
What’s Going On?
There are a confluence of factors at play, such as:
All of these factors together could have a role in eroding existing funds’ returns.
Speculative Bets Don’t Guarantee Sustainable Results
According to Hedge Fund Research, Inc., the HFRI Fund Weighted Composite index had returned a positive +3.3% in 2014, but fell -0.9% in 2015. The decline in hedge fund performance affirms the often-stated but equally ignored fact that past performance is no guarantee of future results. Just look at what happened with Bill Ackman’s Pershing Square Holdings. After ranking among the best performing hedge funds of 2014, its gross returns plummeted to a negative -19.3% (versus S&P 500 Total Return’s +1.4%) in 2015. Glenview Capital Management, another marquee name in the business, is down -15% this year through February after substantial losses last year.
One of the pitfalls of the hedge fund industry is the over-fixation on quick wins—which leads to generating speculative bets. Fundamentals-based discipline typically takes a backseat, which can have negative outcomes. For instance, 50 stocks that , 2016.
Furthermore, hedge funds’ limited transparency has caused concern – another reason why some investors may be shying away from these funds, particularly under vulnerable market conditions. Pershing Square Holdings, for instance, publicly discloses only 11 of its stock positions, and 8 of those positions are down while just 1 is up more than +1% as of March 8 this year.
Bottom Line for Investors
Leverage and limited transparency may be a bit much to handle for jittery investors given current market dynamics. A fundamental, long-term approach, though not as ‘sexy’ and unique as some of the strategies afforded by hedge funds, may produce better returns over time. Stay abreast of economic news (we’ll help). Be aware of corporate fundamentals (we’ll help here too). Think long term. This is our approach at Zacks Investment Management. The benefits are reflected in the five investment strategies we have ranked in the top 10% of their respective classes according to Morningstar—we call this our ‘Dean’s List.’ Learn more about these strategies by clicking below…
Disclosure