The hedge fund industry certainly took a drubbing in the bleak market years which were 2007 – 2008. But, they’re back and they’re back on the heels of good performance and inflows in 2010. Credit Suisse released its 2010 Hedge Fund Industry Review (.pdf) today.
- Hedge funds, as measured by the Dow Jones Credit Suisse Hedge Fund Index, were up 10.95% for 2010 after posting positive performance for seven out of 12 months
- On an asset-weighted basis, an estimated 81% of funds have surpassed previous high water marks as of December 31, 2010
- The industry saw an estimated USD $8.5 billion in inflows for the fourth quarter, bringing overall inflows to $22.6 billion for the year. This represents the largest annual inflows into the space since 2007
- The largest inflows in 2010 were seen in the Global Macro and Event Driven Sectors, up $16.8 billion and $13.9 billion respectively, while the largest outflows were seen in the Multi-Strategy sector which lost $16.9 billion
- Including performance gains, current hedge fund industry assets under management (AUM) grew to $1.7 trillion as of December 31, 2010, up from $1.5 trillion on December 31, 2009
- Research of returns from January 1996 through December 2010, indicates that smaller hedge funds (less than $100M AUM), have historically outperformed larger hedge funds (greater than $500M AUM) by 3.95% annually
Check out the whole report here.
As if we needed another study to spell this out, S&P published a recent study (.pdf) that undermines the hot money chasing performance in the mutual fund industry. The study shows that very few funds demonstrate persistence — the ability of asset managers to consistently achieve top-quartile or top-half performance.
The amazing take-away from the study:
Over the five years ending September 2009, only 4.27%
large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods. No large- or mid-cap funds, and only one small-cap fund maintained a top quartile ranking over the same period.
Couple of things here:
- Not one large-cap or mid cap fund maintained top quartile ranking. Should investors just use large cap and mid cap indices for their exposure here regardless?
- While still posting rather poor results, there are twice the percentage of small cap funds achieving top-half performance than large caps. There still seems to be significantly more value in active portfolio management in the small cap arena.
The study’s ultimate takeaway:
Our research suggests that screening for top-quartile funds may be inappropriate.A healthy plurality of future top-quartile funds comes from the prior period’s second, third and even fourth quartiles. Screening out bottom quartile funds may be appropriate, however, since they have a very high probability of being merged or liquidated.
Compare that to the findings of Jagannathan, Malakhov, and Novikov in “Do Hot Hands Exist Among Hedge Fund Managers?”:
We find evidence of persistence in the performance of funds relative to their style benchmarks. It appears that on average more than 25% of the abnormal performance during a three year interval will spill over into the following three year interval.
[Hat tip: Pragmatic Capitalist]