Exploring 2012 Performance Anxiety: Even Ray Dalio can't get it up (returns, that is)

By Rob Copeland

Fri Oct 26, 2012

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Is this year a rebound for the industry, or yet another example of expensive underperformance?


Six months before Jekyll & Hyde: The Musical is revived on Broadway, the hedge fund industry is turning in its own two-faced performance.

As the recent Absolute Return quarter-end performance wrap pointed out, this year can fairly be called a bounce-back for the industry. Managers are profiting who only twelve months ago helped the industry produce its second losing year in 14.

Some 79% of funds in the Americas were positive in the third quarter, a better showing than that of funds in Europe and Asia. Even some surprising early year laggards like Bridgewater Associates and FX Concepts have managed to pull themselves into the black. A full 54% of funds in the HedgeFund Intelligence database are above their high-water marks.

If this sounds like good news to you, you wouldn't know it from reading in the Wall Street Journal, which recently lamented that "Hedge Funds Belt Few Home Runs." With the solemnity of an advertisement for the Marines, the paper observed, "They are the few. The proud. The hedge fund managers making a killing this year."

Then the Journal added this shot across the bow of the S.S. Greenwich Avenue: "Those hedgies who have managed to beat the market are driven by a few distinctive--if sometimes risky--strategies."

Distinctive! If buying up mortgage bonds, pocketing the yield and marking the appreciation in the bond as a monthly gain for the fund has been trademarked, somebody call Stephen Glass because theres a lot of plagiarism going on in some of the industry's biggest names.

Sure, the aforementioned mortgage trade is not without risk. But investors should be expected to do a private-high-school-level of research before handing money to any well-suited midtown Manhattan marketer handing out glossy Ovis Creative-produced pitchbooks.

Back to those double-digit gains and how tragically rare they are. Yes, it is true that high-flying strategies with double-digit returns are the exception and not the rule, but that is by design. To survive in the post-2008 court of public opinion, the industry largely recast itself as a drab champion of dependable yield in a long-term low-rate environment. The average institutional investor far prefers a steady diet of singles over swinging for the fences with the chance of a strikeout, and is apparently willing to pay hedge fund fees to get it.

Fifteen of the Absolute Return Composites 16 strategies are positive this year, and the majority will deliver returns to satisfy, if not blow away, most pension and endowments roughly 7-8% annual return targets. That's enough to get a call back for another date, regardless of how the Standard & Poor's 500 has performed.

Mocking the majority of the industry's best returns as due only to exotic new bets belies the fact that hedge funds are a diverse lot of geniuses and goats, and that many of the biggest names have actually been reducing their swings over the long term. With some exceptions (hey there, Chase Coleman!), hedge funds long ago ceased being sexy. Those who would lament the lack of outsized gains are putting on rose colored glasses for a hedge fund era that hasn't existed for many years. As Simon Lack has ably explained, in the days when the hedge fund industry produced those fantastic fairy tale returns, you could fit all of the managers into a NYC subway car, and no one would need to stand, either.

In 2007, which has been selectively memorialized as the last year of fun before the keg dripped dry at the hedge fund house party, many big name managers actually did just OK. The Millennium International Fund rose an unsensational 10.99%. The Canyon Value Realization Fund gained a modest 6.91%. The Marathon Special Opportunities Fund returned 7.25%.

That is again the truth this year for many prominent managers, and it should surprise few. Bridgewater's Pure Alpha fund is up less than 1% this year through the end of September. Millennium has gained less than 4%. Och-Ziff Capital Management's Master Fund has basically tracked the Absolute Return benchmark. But none of these firms is going away anytime soon.

For better or worse, the face of the industry is neither Jekyll nor Hyde. The industry has matured. It's in its 35th year of marriage at 10pm in granny panties watching Nick at Nite and reheating the early bird special to eat on a TV tray in an adjustable bed. Put your teeth on the nightstand. The sexy times ended a long time ago.

Absolute Return staff writer Rob Copeland can be reached at rcopeland@absolutereturn.net

ISSN: 2151-1845 / CDC10004H

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