What’s wrong with the Hedge Funds?

As often we refer to the Hedge Funds Research to have the big picture about what’s going on, in one of the most complicated sector of the alternative investment industry. The figures of last year resemble very much to year 2009, the difference this time is that 2014 hasn’t been a year of global crisis, or it has? Actually, the past year was dramatic for 980 hedge funds, as they were constrained to shut down their investment activity. This was the highest level since 2009.

If that wasn’t enough, the entire hedge fund industry ended the year with a negative average rate of return, at around -0.9%. Increasingly single manager funds are having problems in today’s investment environment. Meantime, quantitative hedge funds are performing better. This is a sign that the ongoing process of automatization is putting pressure on funds that depend on individual decisions. The best performing funds have been dominated by algorithmic investment processes, put in place by increasingly fast super-computers. From a larger point of view, the hedge fund industry has failed to justify the risk taking process, as the sector is often characterized by a high risk-return profile.

The disappointing performance of the sector has pushed investors to redeem their quotes in some of the funds. Investors are becoming very selective due to a “Crowding” process that has put pressure on the sector’s rate of return. According to the data provided by HFR, the entire asset under management of the hedge fund industry totalized around $3 Trillion, down from the previous year due to accumulated losses and redemptions.

The underperformance seen in 2015 continues to worsen in the first quarter of this year. The explosions of some bubbles, that have been created in the past 5 years in many commodity and high yield bond markets, seem to be one of the main reasons of the hedge funds’ underperformance. Volatility has also made life more difficult to the trend-following hedge funds. After having lost the opportunity to attract “New Money” in the first quarter, the sector does not seem to have a happy outlook for the rest of the year. Nonetheless, this sector (also called “Smart Money”) continues to remain a reference point for other investors’ decisions and for their capital allocation’s decisions.

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