After disappointing start to 2013, how will hedge funds catch up?

March 22, 2013

Despite the early-year rally in equity markets, some hedge funds seem to have had a disappointing start… yet again.

JP Morgan notes that the industry’s benchmark HFRI index was up 2.8% by end-February,  well below the 4.6% for MSCI All-Country index.

Some 4.2 percent of hedge funds suffered losses of at least 5% in the first two months of year, compared with 3.3% in the same period in 2012. Still, this is better than 2008/2009, when losses of this magnitude were seen at more than one in five of hedge funds. According to JP Morgan:

In all, this performance picture is rather unexciting, raising the chance that hedge funds will add risk near term to chase the current momentum in equity markets. This performance chasing happened in each of the previous two years, with hedge funds raising their betas during March/April of 2011 or 2012.

Within hedge funds, a strategy mixing long and short positions performed best. Japan long/short strategy returned 7.44 % so far this year, while China long/short and European long/short gained 6.15% and 4.35% respectively, according to Deutsche Bank.

Still, it seems some investors in the $2-trillion-plus hedge fund industry are not as return ambitious as they used to be. The 2013 survey of hedge funds by Deutsche Bank shows that 79% of institutional investors are targeting returns of 5-10% for their hedge fund portfolios. Back in 2010, more than half of investors surveyed were targeting double-digit returns.

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