Key Takeaways
- • Equity hedge funds gained only 1.19% in August and 3.49% year-to-date through August, underperforming the S&P 500's 13.5% return and the MSCI's 8.2% gain during the same period, according to Hedge Fund Research data.
- • Long/short equity managers are positioned defensively despite sustained market rallies, anticipating a market downturn that has not materialized, resulting in significant opportunity cost for investors.
- • Hedge funds are tracking toward their fourth consecutive year of underperformance relative to broad equity indices, raising questions about the value proposition of active long/short strategies in rising markets.
- • The performance gap reflects manager caution and bearish positioning rather than participation in the equity rally, with funds maintaining hedges and short positions that have generated paper losses since mid-year.
Summary
Equity hedge fund managers are substantially underperforming broader stock market indices despite a sustained rally through the first eight months of 2017, raising persistent questions about the role and value of long/short equity strategies in rising market environments. According to Hedge Fund Research, the average equities hedge fund returned only 1.19% in August and 3.49% year-to-date, a stark contrast to the S&P 500's 13.5% gain and the MSCI's 8.2% appreciation over the same eight-month period. This performance disparity highlights a fundamental disconnect between manager positioning and market direction.
The underperformance stems from defensive positioning and anticipatory bearish bets positioned against an anticipated market correction that has yet to materialize. Managers have maintained significant hedges and short positions throughout the rally, incurring substantial paper losses on bearish wagers since June while missing gains as equities continued higher. This cautious stance reflects broader uncertainty among professional money managers regarding the sustainability and drivers of the current market advance, even as retail investors and momentum-driven capital have powered the rally forward.
The 2017 performance marks the fourth consecutive year in which hedge funds are underperforming equity market benchmarks, intensifying investor scrutiny regarding manager skill, market timing ability, and the strategic rationale for allocating capital to long/short equity strategies. The gap between hedge fund returns and broad market indices raises fundamental questions about the risk-adjusted return proposition these strategies offer institutional investors, particularly in environments characterized by synchronized global growth and benign market conditions that reduce the need for downside protection.
The underperformance stems from defensive positioning and anticipatory bearish bets positioned against an anticipated market correction that has yet to materialize. Managers have maintained significant hedges and short positions throughout the rally, incurring substantial paper losses on bearish wagers since June while missing gains as equities continued higher. This cautious stance reflects broader uncertainty among professional money managers regarding the sustainability and drivers of the current market advance, even as retail investors and momentum-driven capital have powered the rally forward.
The 2017 performance marks the fourth consecutive year in which hedge funds are underperforming equity market benchmarks, intensifying investor scrutiny regarding manager skill, market timing ability, and the strategic rationale for allocating capital to long/short equity strategies. The gap between hedge fund returns and broad market indices raises fundamental questions about the risk-adjusted return proposition these strategies offer institutional investors, particularly in environments characterized by synchronized global growth and benign market conditions that reduce the need for downside protection.
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