Hedge funds' unimpressive returns

They're mostly just mirroring the market these days, study finds.

By Kim Peterson Jan 8, 2010 1:55PM
Simple stock picking tips © CorbisLooking to get into hedge funds? You might have better luck with the broader markets.

A new study says that while hedge funds had their best year in a decade last year, their returns were comparable to the gain in the markets.

Hedge funds posted a 24.6% gain last year, while the S&P 500 rose 24.7%, the DJIA was up 18.8% and the Nasdaq soared 43.9%.
The numbers are bringing out the hedge fund bashers, who say that investors should be getting more for the fees they pay. "Hedge fund managers charge enormous fees because they're supposed to serve up excess return, or alpha -- not Alpo," writes DailyFinance.

Clusterstock says hedge fund managers have become "overpaid index huggers."

Hennessee Group, a hedge fund advisory, says the Hennessee International Index rose 21.4% for the year. Sounds good, except when you compare those returns to the 27.8% seen in the MSCI EAFE stock market index.

So you could have done well by choosing the iShares MCSI EAFE Index (EFA), with its 0.35% expense ratio, over a pricey hedge fund, DailyFinance writes.

Similarly, the Hennessee Emerging Markets Index jumped 39.1% while the MCSI Emerging Markets Index was up 74.5%.

Also fueling the criticism is a report showing that hedge funds are not required to report returns, so they just stop reporting when results go bad. "The implication is that failing funds drop off the radar before they report even bigger losses or close altogether, thereby excluding their poor performance from indexes," according to Reuters Breakingviews.

The drop-off in reporting means that industrywide hedge fund returns are probably as much as four percentage points lower, according to Reuters Breakingviews.

Investors could do their part in pushing for better data — and maybe newly hands-on regulators have a role to play as well. Hedge funds still have a strong argument that they offer useful alternative strategies for investors and liquidity for the financial system. But they needn’t rest the case on flawed statistics.







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