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2015 – The Year Nothing Worked, Especially Hedge Funds

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2015 was the year where nothing really worked. Stocks, bonds, commodities, foreign investments are all down. Cash went no where. There wasn’t any place to hide. The only way you could have made money is by holding U.S. dollars and shorting the market. If you held the “FANGs” (Facebook, Apple, Netflix, Google) you made some money. However it’s not exactly what I call a sound investment strategy. With two trading days in 2016 in the books, the FANGS are slumping with everything else. Yet, don’t divest your portfolio to buy these four stocks. They are not the holy grail.

Do you remember your favorite financial advisor mentioning you need a diversified portfolio? Something about asset allocation? When one market is slumping it’s alliright because you have another asset class that’s thriving to balance things out.  Well that didn’t work out too well in 2015.

Below is a table of the performance of some of the main indexes. The crazy thing is that the market was hitting new highs just in May 2015.

2015 asset returns
Source: Barron’s, Bloomberg

Right now hedge fund performance are retaining my attention. Hedge funds used to be the sexy thing. Hedge funds was the go to place for new graduates. After many disappointing years and the financial sector getting clobbered in the media, working at a hedge fund has loss its cachet. Now it’s fashionable to work at tech companies and start-ups. Several well-known funds closed their doors in 2015 as big bets on oil went bust and returns sank. Three Tiger cubs seed funds, JAT Capital Management, and the macro fund of Fortress Investment Group  were among some of the funds that closed shop.

Remember that hedge funds were promoted as investment vehicles that suppose to make money in any markets, bear or bull. Hedge funds also aim to make money even in volatile conditions. Because of that they were able to justify  their high fees. They have historically charged 2% of assets under management and 20% of any profits. Of course their are cheaper and more expensive funds.

The most well-known names in the hedge fund business, considered investment geniuses, such as Bill Ackman of Pershing Square Capital Management and David Einhorn of Greenlight Capital have been crushed, both down around 20%. The depth of their losses is stunning. Bill Last year Bill Ackman was prompted as the next Warren Buffett and now he has a lot of explaining to do to his shareholders. While on the subject of Buffett, his Berkshire Hathaway (BRK) investment machine also did worst than the market.

If the crème de la crème can’t beat the market, who can? Below is a table the hedge fund performance since the financial crisis. To their credits, they performed much better than the market in the 2008 crisis but hasn’t been able to repeat that performance.

Hedge funds performance

To defend themselves, some managers claim that hedge funds never had the objective of beating stock or bond indices. Rather, the role of hedge funds is to provide diversification (uncorrelated returns) when added to portfolios of stocks and bonds and other assets. Also it’s unfair to compare their performance to the equity market because some hedge funds invest in other assets.

In 2016, hedge funds will have a lot of work to do to gain back investor confidence.



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