According to a Bloomberg report, performance of hedge funds in the US will be heading for its worst yearly performance as compared to US stocks since 2005. The USD2.5 trillion hedge fund industry, whose money managers are regarded as the highest paid individuals in the finance world, only returned 7.1% this year through November, according to data obtained and reviewed by the news agency. This was 22 percentage points less with reinvested dividends than Standard & Poor's 500 Index's 29.1% return as financial markets rallies to record levels.
Fieldpoint Private head of research Nick Markola said, "It has been difficult for hedge funds on the short side. Funds were defensively positioned. Central bank action did bode well for equities and made for a more challenging environment for hedge funds." Short selling is defined as the sale of a security that is not owned or is borrowed by the one who is selling the security, and is based on the idea that the price of the security will decline that the seller intends to make money of it.
Based on industrywide assets, hedge funds stood to earn around USD50 billion in management fees for 2013. However, the funds are seen underperforming the US index for the fifth straight year as the economic stimulus program of the US Federal Reserve had pushed up equity markets higher. Last month, billionaire Stan Druckenmiller called the results of the hedge fund industry as a tragedy and raised questions on the massive fees investors pay to hedge funds to gain closer to 8%. Druckenmiller produces an average annual returns of 30% for over two decades.
In a Bloomberg Television interview November 22, Druckenmiller, referring to veteran managers like Michael Steinhardt, Julian Robertson, Paul Tudor Jones and George Soros, said, "We were expected to make 20 percent a year in any market. If the market went down more than 20 percent, we were expected to make more."
Hedge funds typically charge 2% of assets and 20% of profits, but also extends sizeable discounts to big investors. Morningstar Inc said actively-managed U.S. stock mutual funds on average posted 1.3% expense ratios. The managers posted average gains of 31% this year through November, Morningstar added.
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