Pointing to an earlier report about US hedge funds' recent performance, Bloomberg columnist and money manager Barry Ritholtz said in his newest column that there are five reasons why the US stocks is performing better than the funds.
Ritholtz said his fascination with the performance of hedge funds in the USD2.5 trillion industry started came to be when he, like any other industry observer misunderstand. Citing that the performance of hedge funds were both complex and a nuance, industry observers needed to pay attention to this market segment. In 2013 through November, Bloomberg's compiled data indicate that the hedge funds returned only 7.1%. This, the said report stated, was 22 percentage points lower than the 2901% in returns with reinvested dividends by Standard & Poor's 500 Index. Ritholtz calculated that per data cited in a Bloomberg report, a hedge fund on average is underperforming the stock index by over 2,000 basis points in 2013.
Ritholtz presented the five reasons why hedge funds underperformed at a retirement security conference under presentation titled "The High Cost of Neuro-Financial Errors: How Cognitive Bias and Performance Chasing leads to Investing Failures" at the Harvard University Kennedy School of Government this summer.
First reason Ritholtz cited was the ballooning hedge fund industry. According to Ritholtz, there are around 10,000 fund managers aiming to manage over USD2.5 trillion dollars this year. Moreover, Ritholtz doubted that the number of fund managers are all quality talents, deducing that over 9,000 of them are fair to middling. Second, Ritholtz said, is the ability for hedge fund managers to still outperform if they have too big a fund size. The third reason Ritholtz cited in his column is the misconception of the term hedge fund itself. The lack of hedging by funds since 2008 onwards had incurred enormous losses to many of them, with Ritholtz opting to call them highly-leveraged limited active trading vehicles. Ritholtz said the lack of hedging typically enhances performance of a hedge fund in its early days as funds then were not exposed to rallying markets yet.
Ritholtz also attributed the large fees charged by hedge funds as another reason for their underperformance this year. The Bloomberg columnist said investors are better off with the fund with the cheaper fee as high fees compounded over time degrade a fund's performance. The fifth one is that majority of the hedge fund industry is composed of expensive, below benchmark funds.
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