Key Takeaways
- • Dixon Boardman, founder of Optima (entering its 30th year), argues that underperformance in hedge funds represents a cyclical valley rather than structural decline, citing his nearly three decades in alternatives investing.
- • The Hedge Fund Journal Hedge Fund Index reported 2016 industry performance of 5.48%, with most competing indices ranging 1-2 percentage points either side, falling significantly short of US institutional investor targets of 7-8% absolute returns.
- • Boardman expects a fundamental shift in market drivers from excess liquidity toward fundamentals-based valuation, creating conditions favorable for active stock-picking strategies to identify winners and losers in sectors experiencing secular change.
- • European investors and insurance companies with lower absolute return benchmarks are meeting performance targets, while US pension funds and institutional investors face persistent performance shortfalls in the post-crisis era.
- • The article reframes recent underperformance as a potential inflection point, suggesting market conditions are maturing toward an environment where skilled hedge fund managers can demonstrate outperformance through fundamental analysis rather than macro liquidity flows.
Summary
The hedge fund industry faces a perception problem rooted in genuine performance disappointment, particularly among US institutional investors. According to The Hedge Fund Journal Hedge Fund Index, industry performance in 2016 reached 5.48%, with comparable indices clustering within 1-2 percentage points of this level. While these returns may satisfy European investors and insurance companies operating under modest benchmarks, they represent a significant shortfall for US pension funds and institutional allocators targeting absolute returns of 7-8%—expectations that hedge funds have consistently failed to meet in the post-financial crisis period.
Dixon Boardman, founder of Optima and a veteran allocator with nearly three decades in alternatives, challenges the prevailing narrative of fundamental asset class weakness. Boardman contends that historical cycles in asset class performance suggest that "just when the crowd counts an asset class as out is when it often turns around." Rather than interpreting recent lackluster returns as evidence of structural obsolescence, he frames current conditions as a potential inflection point. As Optima approaches its 30th year of operations, Boardman's perspective rests on an expectation of meaningful market regime change.
The catalyst Boardman identifies is a transition from liquidity-driven markets toward fundamentals-based price discovery. Under such conditions, active security selection becomes materially more valuable. Boardman notes that "good hedge fund managers have the potential to outperform by identifying the 'winners' and 'losers' in sectors undergoing secular change," suggesting that the coming environment will reward stock-picking skill over passive exposure or macro positioning. This outlook implies that performance dispersion among hedge funds may widen, with skilled managers demonstrating alpha generation while less sophisticated vehicles continue underperformance.
The geographic bifurcation in investor satisfaction reflects differing return expectations rather than uniform industry failure. Investors accepting single-digit returns in absolute terms have largely met their targets; those requiring consistent 7-8% performance have been disappointed. Understanding this distinction is critical for evaluating whether hedge fund underperformance represents a cyclical valley amenable to recovery or a structural erosion of the asset class's value proposition.
Dixon Boardman, founder of Optima and a veteran allocator with nearly three decades in alternatives, challenges the prevailing narrative of fundamental asset class weakness. Boardman contends that historical cycles in asset class performance suggest that "just when the crowd counts an asset class as out is when it often turns around." Rather than interpreting recent lackluster returns as evidence of structural obsolescence, he frames current conditions as a potential inflection point. As Optima approaches its 30th year of operations, Boardman's perspective rests on an expectation of meaningful market regime change.
The catalyst Boardman identifies is a transition from liquidity-driven markets toward fundamentals-based price discovery. Under such conditions, active security selection becomes materially more valuable. Boardman notes that "good hedge fund managers have the potential to outperform by identifying the 'winners' and 'losers' in sectors undergoing secular change," suggesting that the coming environment will reward stock-picking skill over passive exposure or macro positioning. This outlook implies that performance dispersion among hedge funds may widen, with skilled managers demonstrating alpha generation while less sophisticated vehicles continue underperformance.
The geographic bifurcation in investor satisfaction reflects differing return expectations rather than uniform industry failure. Investors accepting single-digit returns in absolute terms have largely met their targets; those requiring consistent 7-8% performance have been disappointed. Understanding this distinction is critical for evaluating whether hedge fund underperformance represents a cyclical valley amenable to recovery or a structural erosion of the asset class's value proposition.
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