[caption id="attachment_6560" align="alignleft" width="300" caption="John Paulson, Paulson & Co"]
In spite of their poor performance in recent times (check out Hedge Fund Performance in November
), hedge funds are still on the top of many investors' lists.
The average hedge fund was down 4 percent through the end of November, but investors, especially institutional investors, are not swayed. "The rationale is that they desire yearly returns of, say, 8 percent.
Bond yields are low — no more than about 2 percent for safe 10-year government paper — and the prospects for equities dim in the face of anemic developed-world growth anemic," reports the New York Times
. "Unless these investors lower their expectations, they have little choice but to bet that more rational conditions will return and that hedge funds armed with brains, flexibility and, they hope, judicious leverage will again deliver double-digit returns." It really is a paradox.
On the one hand, "more than the usual number of pension fund managers and the like are disappointed with hedge fund performance," according to the New York Times. "But the number intending to hand over still more money for hedge funds to manage far outweighs those planning to withdraw cash." In fairness, hedge funds are poised to move past the poor returns seen in 2011 and investors investing now get all the benefit of "buying low." But, investors need to realize that markets will likely continue to be erratic in 2012 – and, big name managers struggling to prove their worth, may respond ineffectively to the market. Take for instance John Paulson
. After his Advantage Plus hedge fund lost 47%
in the first nine months of the year Paulson began to scale back his bullish bets. It turned out, Paulson was right – the market did bounce back. Only, by the time it did (in October), Pauson was no longer in a position
to benefit from the rally.