According to a new report from Goldman Sachs Group Inc (NYSE:GS) hedge funds are not doing well in 2013. Overall just 5% of equity hedge funds are actually managing to beat the market. According to the analysis hedge fund long bets are actually doing well. It’s the shorts that are killing returns.

Hedge Funds

The report, which deals with returns from the start of the year through to August 9, finds that average equity hedge funds have returned just over 4% to its investors for the year so far. That number pales in comparison to the more than 16% increase in the S&P 500 in 2013, and the over 20% increase in the Nasdaq.

Hedge fund short interest fails

The report found that the Hedge Fund VIP basket, a mix of the long positions widely owned among hedge funds, returned 23% through August 9 beating the 20% returns in the S&P 500 in the same period. The trouble for hedge funds begins and ends, it seems, on the short side.

The Goldman Sachs Group Inc (NYSE:GS) basket of equities with the highest short interest actually gained more than 20% in the period leaving many hedge funds paying short fees, and losing returns on the gains. The nature of shorts is, however, tricky. Hedge fund returns could return if some of those key positions begin to show declines in the rest of the year.

Twelve of the fifty short positions included in the basket by Goldman Sachs Group Inc (NYSE:GS) actually managed to at least triple the returns of the wider market through August 9. The shortfall in hedge fund returns could leave managers desperate for solutions in the closing months of the year.

Big short troublemakers

The list of high short interest shorts causing trouble probably includes companies like Herbalife Ltd. (NYSE:HLF) with more than 30% of shares held short, RadioShack Corporation (NYSE:RSH) with 39.2% and US Airways Group Inc (NYSE:LCC) with 24%. Those firms have risen by more than 90%, 37% and over 20% so far this year.

Some of the big shorts, like that in Herbalife Ltd. (NYSE:HLF), have been driven from the hedge fund world with Bill Ackman leading the charge against the nutritional supplement multi-level marketing company. That attempt, like so many shorts in the past, is dragging on, and that old phrase about solvency and irrationality might be worth repeating to hedge funds managers as they head into the close of the year.