Did Equity Long/Short Hedge Funds Fail Investors in 2008 & 2009?
| Apr 8th, 2010 | Filed under: Performance, Analytics & Metrics, Today's Post | By: Guest |
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By: Neil Kotecha, CAIA, BNY Mellon Wealth Management. Member, AllAboutAlpha.com Editorial Board
With last year’s returns finalized, some are questioning the effectiveness of equity long/short hedge funds. After posting losses in excess of 26% in 2008, the HFRI Equity Hedge Index failed to outperform the MSCI World Index in 2009. So, do these two years prove the cynics’ skepticism of equity long/short hedge funds right?
The short answer is no. While many funds failed to meet their individual objectives over the past two years, the broad group was successful in achieving its primary purpose, which is to hedge equity risk. To come to a comprehensive conclusion, performance must be analyzed through this objective-driven prism rather than in a total-return vacuum. Below is a review of the two-year period as well as the last full bull and bear markets. More…
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I feel this analysis is overly simplistic and somewhat misleading. Based on this research, investors are getting decent downside protection along with some upside capture relative to the index. But is that really worth the 2 and 20 fee (or even just 2% management fee because of highwater marks not being recaptured)? The two main issues that I have with this analysis is 1) the benchmark and 2) the hedge fund “index” used. With regards to the benchmark, the investing world is advanced enough that the average investor has a number of tools at their disposal to manage portfolio risk. Simply purchasing the MSCI World is one option but if the investor desires reduced volaitlity they could simply, and cheaply, purchase puts or short the index at a level that would get them to their desired net exposure – typical long/short equity funds are in the 50-60% range. Second, the HFRI index used is full of a number of biases that have been thoroughly addressed (e.g. survivorship bias) that leads to inflated performance. Using HFR’s “investable” HFRX Equity Hedge index is a better proxy and those performance numbers are much less appealing – up 2.6% cumulative over the period analyzed. Beyond this issues such as crowded trades (both long and short), group think amongst managers, and less liquidity than an index or long-only manager further limit the benefits of the strategy. The bottom line is that the average equity long / short manager does little more than provide muted equity exposure, which can be easily replicated for far less than the average fee.
[...] Did equity long/short funds blow it in 2008-09? (All About Alpha) [...]
What the data in the above article show is that long/short equity is little more than deleveraged equity. Look at the numbers and the graph. Both indices go up and down together, except that the L/S index runs on half the volatility and therefore only mirrors half the movement of the equity index. Anybody who concludes from that, that “the broad group was successful in achieving its primary purpose, which is to hedge equity risk” urgently needs to look up the meaning of “hedge” in the dictionary.
[...] Did Equity long/short hedge funds fuck up in 2008/2009 (All About Alpha) [...]
Thank you Harry – you made the point I was trying to make much more concisely.