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 |  Subject: Schmucks: 88% Of Hedge Funds, 65% Of Mutual Funds Underperform Market In 2012  Sat Jan 05, 2013 11:20 pm | |
| 2012 is a year most asset managers would like to forget. With the S&P returning 16% and Russell 2000 up 16.3%, on nothing but multiple expansion in a world where risk has been eliminated despite persistently declining revenues and cash flows, a whopping 88% of hedge funds, as well as some 65% of large-cap core, 80% of large cap value, and 67% of small-cap mutual funds underperformed the market, according to Goldman's David Kostin. The ongoing absolute outperformance of mutual funds over their 2 and 20 fee sucking hedge fund peers is notable, as this is the second or perhaps even third year in a row it has happened. And while the usual excuse that hedge funds are not supposed to beat the market but a benchmark, and generally protect capital from downside risk is valid, it is irrelevant if any downside risk (see ongoing rout in VIX and net position in the VIX futures COT update) is now actively managed by central banks both directly and indirectly, their HF LPs no longer see the world in that way. In fact as Bloomberg Market's February issue summarizes, some 635 hedge funds closed in 2012, 8.5% than a year earlier, despite a far stronger year for the general indices. The reason: LPs and MPs have simply had enough of holding on to underperformers and get swept up in the momentum of performance chasing, and the result is redemption requests into funds who may have had a positive benchmark year, but underperform relative to the S&P for two or more years, which nowadays is the vast majority of funds.
Yet it is not fair to say that all hedge fund strategies have failed: the clear winner among them? Mortgages, driven by none other than the worst kept secret of 2012 - the arrival of QE3, and the $40 billion a month monetization in MBS. While at least QE3 and 4 once and for all sealed any debate over whether there is economic improvement in the US (there isn't, hence the Fed's monthly injection of $85 billion in flow), it was Pimco who was the beacon of what was to come as Zero Hedge readers were made well aware back in February with "Pimco Borrows A Record $88 Billion To Bet On Fed's Upcoming MBS Monetization." Anyone who piggy backed generated the highest Bernanke-assisted Alpha there was to capture in the past year.
Some other facts from Bloomberg Markets:
Three of the top five funds invested in mortgage securities and two of them are run by the same company. Betting on mortgage securities outpaced every other strategy, with an average return of 20.2%, against an industry average of just 1.3%.
Two of the top 10 funds are based in the UK.
While Tiger Management Julian Robertson's "Tiger cub" funds dominated last year's top echelon (including Tiger Global fund at number 1), only one cracked the top 20 this year.
Poor returns forced an estimated 635 hedge funds to close in the first nine months of 2012, 8.5% more than a year earlier. Even some big name managers threw in the towel.
While the bulk of hedge funds disappointed, the following were the Top 20 best performing hedge funds according to Bloomberg:
More: http://www.zerohedge.com/news/2013-01-05/88-hedge-funds-65-mutual-funds-underperform-market-2012
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