According to Brendan Conway over at Barron’s, last year investors approached hedge funds in the exact wrong way. Hedge funds in markets that performed particular well in 2012 saw their assets under management shrink last year while hedge funds involved in poor markets saw their assets swell. We’ve looked at the danger hedge funds pose to many investor’s returns before, but this information really shows there’s something wrong in the fund market.

Hedge Funds

According to Conway, long/short equity funds saw the largest proportion of outflows of any category last year, while these funds, on average, are up around 20% so far in 2013, and a 6% rise in April alone. Long/short equity funds were the strongest performing large category in the early months of 2013.

It’s no wonder that equity funds have been performing so well in the opening months of the year. Indexers, that most reviled of hedge fund manager, should be making returns of around 15%, with no work attached. So far in 2013, the S&P 500 is up 14.32%, the Dow Jones is up 15%, and the Nasdaq is up 13%.

By simply investing broadly in the market and staying away from risky equities, average returns of 20% are not at all surprising in the current market, though the flight of investors from long/short equity funds through 2012 is a real surprise. The market in 2012 was nothing like the gains so far this yea, and it was uneven at points, but there seems little reason to push investors out of the market.

In the twelve months of 2012, the S&P 500 rose by more than 16%, the Dow Jones rose 7%, and the Nasdaq rose by close to 16%. Investors, as Mr. Conway points out in his opening line, are charged with chasing high returns, in 2012 investors seem to have shied away from those returns in favor of a less lucrative investment strategy.

Hedge funds as a whole performed quite poorly in 2012, though there were some  major exceptions, most notably those run by Tepper, Einhorn and Loeb. So far in 2013, hedge funds concentrating on the equity market have been doing incredibly well, but there are some exceptions, including the John Paulson Gold Fund.

That fund lost out on the falls in the price of gold through April, and there are few saving graces for investors who got involved recently. Equity funds are doing great right now, but the deflationary dollar environment might have other ideas.