losing money

Over the last twenty years, a lot of research has been done to assess the performance of sell-side analysts (i.e., analysts working for independent research firms, brokerage firms and investment banks). Many studies show that their forecasts are pretty bad. At the end of the year people like to poke fun at some of the predictions. We are guilty as well, and  our article on Knight Capital Group Inc. (NYSE:KCG) sellside predictions proves this.

However, buyside analysts seem to receive far less credit. Additionally, less is known about the performance of buy-side analysts (the ones working for hedge funds, mutual funds, pension funds and endowment funds, excluding mutual funds). However, we have some pretty good sources and there is public data out there. Let us start with hedge funds:

Unfortunately, many hedge funds and endowment funds have disappointed millions of investors in the past couple of years. And 2012 has been much worse for hedge funds, as their gains have lagged the returns generated in the stock market. Goldman Sachs hedge funds monitor found that hedge funds returned 5.9 percent YTD on an average, compared to 14.5 percent gains in S&P 500 (S&P Indices:.INX) by the end of Q3,. That’s a whopping 860 basis points difference. The performance has picked up a bit towards the end of the year, but hedge funds still trail the S&P 500 (S&P Indices:.INX) by several hundred basis points. And there are some individual hedge funds that have lost billions of dollars of investor money.

This under-performance has caused fury among investors. With 860 basis points of difference, they could easily have earned a lot more money buying an index fund. According to BarclayHedge, investors have collectively pulled out $13.2 billion from hedge funds this year through August. TrimTabs Investment Research says that it tracks 3000 hedge funds. The assets of these 3000 hedge funds have declined 28.7 percent, from the highs of $2.4 trillion in 2008, due to two reasons – withdrawals and weak performance. And you know that withdrawals happen mostly because of weak performance.

Endowment funds aren’t any good either. On an average, they lost 0.3 percent through June this year. The nine-year old Endowment Fund, run by Mark Yusko, was down 2.5 percent for the 12 month ending August. Compare that with 18 percent gain of S&P 500-stock index in the same period. If that’s not disappointing, investors had to pay about 3.5 percent to Endowment Fund a year for successfully destroying their money. What’s more, the investors who came to Endowment Fund on Merrill Lynch’s recommendation, had to pay 2.5 percent upfront fee to Merrill Lynch. The wealth management unit of Bank of America Corp. (NYSE:BAC) earns hefty commissions by selling the fund.

Investors took out over a billion dollars from the Endowment Fund, about 25 percent of its total assets, this year through September. So, Mr. Mark Yusko has decided to limit the amount investors can take out each quarter.

Mutual funds have had a better year. The average mid-cap blend fund is up 14.21% according to Morningstar. However, that still trails the 15.33 percent gain for the S&P 500 (S&P Indices:.INX).

The phenonom of fund managers under-performing is not new and quite logical. The funds are part of the market and on average they will produce market returns minus the fees. However, 2012 stands out since hedge funds which have the largest fees had such terrible performance on average.

The sellside industry is far from perfect, but perhaps they should not be the only analysts criticized by the media.