Hedge funds flat during the first half of 2010, report reveals

News - Funds

Written by Ray Clancy

Wednesday, 21 July 2010 10:27

Most hedge funds managed to come through the market tumult of the first half of 2010 with flat to slightly lower returns, but it is feared that such a pretty average performance may not satisfy wealthy investors going forward.

For the year to date, the average hedge fund lost 1.45%, according to the latest data released by the Hennessee Group. But compared with the 7.6% decline in the Standard & Poor’s 500 index, the lackluster performance of the $1.6 trillion hedge fund industry doesn’t seem so bad.

Still, wealthy investors, pension funds and university endowments have come to expect hedge fund managers to make money in both good and bad markets, so simply posting smaller losses than a benchmark index may not be satisfactory.

And that means in the second half, fund managers will be under pressure to end the year firmly in the black. Many are still trying to regain their investors’ confidence after a brutal 2008 that led to many fund liquidations.

Even star managers like John Paulson, whose investors celebrated eye popping returns in 2007 and 2008, may be feeling the heat. This year, Paulson’s flagship Paulson Advantage fund is down nearly 9%.

‘A lot of funds rebounded last year from 2008. But if an investor is looking at them over a three-year-period and they are flat this year, they’re not making money,’ said Jayesh Punater, founder of Gravitas Technology, which provides financial services to hedge funds.

The fear for many managers is that if they can’t turn things around in the second half, investor redemption requests could surge in December and reverse the trend of new money coming into the industry.

Investors put $24 billion of cash into hedge funds in the first five months of 2010, about the same amount they added in the last four months of 2009, according to data from TrimTabs.

Hedge fund managers had to navigate around a lot of obstacles and unforeseen events in the first half of the year. Concerns about European sovereign debt, the impact of financial reform on bank earnings, the potential for a double dip recession, and the stock markets flash crash on May 6 all played havoc with various investing strategies. The first half was a particularly rough period for funds focused on pro-growth and currency strategies.

‘The noise quotient in the market has been very high this year and it is hard to make money when there is that amount of underlying volatility,’ said Jason Bonanca, head of strategy and research for hedge fund MKP Capital Management in New York.

Ultimately, managers, who are often paid a 2% management fee and take 20% of annual profits, will have to justify those high fees with returns to their investors, who might have done better with a bank savings account in the first half.

‘People who are flat are not going to be happy. But given all the headwinds that you’ve seen this year, what’s important is they haven’t lost their capital,’ said Robin Lowe, head of equity hedge for the United States and Europe at Man Group.

‘This industry is about long term capital growth and that also means capital preservation. If you are flat to slightly positive on the year and indexes are down around 10%, that’s a pretty good outcome,’ he added.

But some strategies have found positive territory. Investors who bet on corporate debt have fared better than most, as fixed income funds were up 4.72% in the first half, the Hennessee report also shows. Distressed investing also fared well in the half, gaining 4.85%.