| Hedge Fund Observer: One good month |
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| 19/02/2006 | |
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Hedge funds might have had their best monthly run in five years last January, according to the Credit Suisse / Tremont Hedge Fund Index, but new academic evidence points out that very few hedge funds are likely to beat broad-based indices over the long term. According to research* by Harry Kat and Helder Palaro of the London-based Cass Business School, no more than 17.7% of the hedge funds in a research sample beat their benchmark. The two academics came to that conclusion comparing fund returns with the returns on dynamic futures trading strategies with the same risk and dependence characteristics. "In other words, the majority of hedge funds have not provided their investors with returns, which they could not have generated themselves by mechanically trading S&P 500, T-bond and Eurodollar futures", write Professor Kat and his collaborator Helder Palaro. "Over time, we observe a substantial deterioration in overall hedge fund performance. In addition, we find a tendency for the performance of successful funds to deteriorate over time, which supports the hypothesis that increasing assets under management endanger future performance." Performance The short-term news is much more upbeat. The Credit Suisse/Tremont Hedge Fund Index is up 3.23% for January 2006, its highest monthly return since August 2000. "Hedge funds continued their strong performance from December into January. The global appetite for risk and strong equity markets pushed the Long/Short sector up 4.18% and the Emerging Markets sector up 5.76% for January 2006," said Mr. Schupp, President of the Credit Suisse Tremont Index LLC. "Convertible Arbitrage managers reported a performance of 2.75%, the strongest in 3 years. The managers profited from higher valuations and increased inefficiencies after a year of numerous fund closures in 2005." Data coming from the Hennessee Group confirmed the trend. The Hennessee Hedge Fund Index rose +3.51%, beating two broad equity market indices: the S&P 500 increased +2.65%, the Dow Jones Industrial Average was up +1.38% Only the NASDAQ Composite Index did better than the hedge fund index, with a +4.56% rise. Those performances might comfort investors looking to beat the indices, but surely not those trying to diversify away from traditionally managed equity funds. The only index that behaved differently to the Hennessee Hedge Fund Index is the Lehman Brothers Intermediate Government Corporate Bond Index, which decreased -0.02%. J.L. * Superstars or Average Joes: A Replication-Based performance Evaluation of 1917 Individual Hedge Funds. Harry M. Kat and Helder P. Palaro. |
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