Hedge Fund Strategy Makes Major Difference in Performance

Hedge funds may have had a rough time of things lately – the average hedge fund was down 4% year-to-date through the end of November – but the losses are not distributed evenly across the board. Big name hedge fund managers like John Paulson have received a lot of media attention lately for low returns but research is showing that the issue may not necessarily be who is managing the fund, but how. In other words, hedge fund strategy itself seem to be more of an issue, reports Frank Voisin.

largest hedge funds in the world

Hedge funds using a “fundamental value” strategy performed worst, losing 23.6%, on average, through the first 11 months of the year. “Equity hedge” funds reported mean losses of 19.6% while “market directional” funds were a close runner, with average returns of -18.9%. “Fundamental growth” funds didn’t fare much better. They lost 15% year-to-date on average through the end of November. In comparison, funds focusing on “distressed securities” performed much better, returning -7.6% through the first 11 months of the year. “Event driven” funds lost just 5.0% whereas “macro” funds lost 4.4%.

Funds using arbitrage or absolute return strategies performed on par or better than average. ”Relative value” funds came in with returns of -4.0%, followed closely by “absolute return”" funds at -3.8% and “special situations” funds at -3.7%. “Equity market neutral” funds reported average returns through the end of November of -3.2%, just barely underperforming “convertible arbitrage” funds, which had average returns of -3.1%. Funds using a “merger arbitrage” strategy performed best, losing just 2.5%.

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