Hedge funds saw weaker returns in 2010
Hedge funds poorer performance was largely due to the fact that they cannot make as many bets with borrowed money, analysts said.
Hedge funds on average returned just 4.52% in 2010, the figures from Hedge Fund Research's HFRX index show, some way below the FTSE 100's 10.5% jump or the Standard & Poor's 500 Index's 12.7% rise.
The hedge fund industry's lackluster performance in 2010 could spur more investors to question whether it is worth paying higher management fees for the funds, experts said.
When an investor gives money to a hedge fund manager, they are looking for returns that do not depend on the broader market, and can therefore improve the performance of the investor's overall portfolio, said Gabriel Burstein, global head of investment research for Lipper and Digital Ventures at Thomson Reuters. 'It's one of the Number One reasons that people invest in alternative investments,' Burstein explained.
Even so, investors were forgiving in 2010. Hedge funds saw net inflows from investors in 2010 for the first time since the credit crisis began, as investors have grown more confident that hedge funds can withstand the markets, according to data from Credit Suisse.
It was a tough year for hedge fund managers for many reasons, including limitations on how much funds can borrow, and difficult to analyze changes in the political landscape that spurred sovereign debt crises and new regulations.
Bailouts for Greece and Ireland in particular spooked many funds into reining in their bets.
'Hedge fund managers are significantly more conservative than they were at the beginning of 2008 and I don't think there are really the mega opportunities, like there were in subprime in 2007 and 2008,' said Virginia Parker, chief investment officer at Parker Global Strategies, a firm that advises institutional investors on hedge funds.
Banks are less willing to lend money to hedge fund managers to make big bets, and funds' investors are also reluctant to magnify their potential losses by allowing managers to take on debt.
However, not every fund has performed poorly. For example, funds with exposure to credit markets had a strong year. Louis Gargour's LNG Europa Credit fund, which bets on corporate credit, rose 76.8% in the first 11 months of the year, after making more than 80% last year. Cheyne Capital's European Event Driven fund rose 19%, according to investors in the fund. And Dan Loeb's Third Point Offshore fund was up more than 25% by the end of November, according to numbers compiled by HSBC.
Investors who proved their strategies were nimble did well, and hedge fund investors went heavily into global macro strategy funds, which are able to invest across many asset classes and adapt quickly to changes in policy.
Hedge funds on average returned just 4.52% in 2010, the figures from Hedge Fund Research's HFRX index show, some way below the FTSE 100's 10.5% jump or the Standard & Poor's 500 Index's 12.7% rise.
The hedge fund industry's lackluster performance in 2010 could spur more investors to question whether it is worth paying higher management fees for the funds, experts said.
When an investor gives money to a hedge fund manager, they are looking for returns that do not depend on the broader market, and can therefore improve the performance of the investor's overall portfolio, said Gabriel Burstein, global head of investment research for Lipper and Digital Ventures at Thomson Reuters. 'It's one of the Number One reasons that people invest in alternative investments,' Burstein explained.
Even so, investors were forgiving in 2010. Hedge funds saw net inflows from investors in 2010 for the first time since the credit crisis began, as investors have grown more confident that hedge funds can withstand the markets, according to data from Credit Suisse.
It was a tough year for hedge fund managers for many reasons, including limitations on how much funds can borrow, and difficult to analyze changes in the political landscape that spurred sovereign debt crises and new regulations.
Bailouts for Greece and Ireland in particular spooked many funds into reining in their bets.
'Hedge fund managers are significantly more conservative than they were at the beginning of 2008 and I don't think there are really the mega opportunities, like there were in subprime in 2007 and 2008,' said Virginia Parker, chief investment officer at Parker Global Strategies, a firm that advises institutional investors on hedge funds.
Banks are less willing to lend money to hedge fund managers to make big bets, and funds' investors are also reluctant to magnify their potential losses by allowing managers to take on debt.
However, not every fund has performed poorly. For example, funds with exposure to credit markets had a strong year. Louis Gargour's LNG Europa Credit fund, which bets on corporate credit, rose 76.8% in the first 11 months of the year, after making more than 80% last year. Cheyne Capital's European Event Driven fund rose 19%, according to investors in the fund. And Dan Loeb's Third Point Offshore fund was up more than 25% by the end of November, according to numbers compiled by HSBC.
Investors who proved their strategies were nimble did well, and hedge fund investors went heavily into global macro strategy funds, which are able to invest across many asset classes and adapt quickly to changes in policy.
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