The Wall Street Journal: Market volatility hurting hedge funds

July 15th, 2012

There are many different financial instruments that are available for accredited investors to utilize in the hopes of gaining returns.  One of these alternative investments is called a hedge fund.

These actively managed funds have many different strategies, including “taking advantage of events” and “negating the impact and risk of general market movements.”

However, The Wall Street Journal reports that recent market volatility, or uncertainty, has been “hurting some hedge funds’ performance.”

The WSJ reports that last year, when “the market swung wildly but ended the year flat,” equity hedge funds had one of their worst annual performances of the past decade.

Hedge Fund Research Inc., a corporation that specializes in the analysis and indexation of hedge fund performance, reported that hedge funds were down about 8.4 percent in 2011.

This is the worst since 2008, another year of strong market volatility, when hedge funds’ performance fell 27 percent.

When the markets “calmed in the first quarter of this year,” hedge funds “turned in their strongest performance in the period in a decade – a 7.3 percent gain,” reports The WSJ.

An example of this “bounce back” is the performance of the hedge fund T2 Partners, which manages $260 million in assets. According to The WSJ, they were down 23 percent at the end of 2011.

When the markets calmed down in the first three months of 2012, T2 Partners “had their best quarter in more than 13 years,” with a 24 percent gain.

According to The WSJ, market volatility returned earlier this April, “amid renewed concerns over Europe’s debt crisis, concerns regarding the strength of the U.S. economy and doubts about China’s growth.”

Vidak Radonjic, a hedge fund advisor from Beryl Consulting Group, LLC, said, “The party’s over in terms of returns.”

Evidence of this volatility is shown by the six triple-digit moves in the Dow Jones Industrial Average, a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq, between April 1 and April 17.

The WSJ reports that this amount of fluctuation of that magnitude is equal to how many there were in the “three previous months combined.” U.S.-based hedge funds responded with a median annual return from April 1 to April 13 of -0.92 percent.

Volatility in the market can hurt hedge funds’ returns by increasing the correlation among stocks, regardless of their underlying fundamentals.

These fundamentals are what hedge fund managers rely on when they are creating their portfolios and “deciding which stocks to bet will go up or down,” according to The WSJ.

Hedge fund managers are hoping to learn from their mistakes last year, and take into account possible upcoming turmoil when making their investment decisions.

Robert Duscolo of PineBridge Investments, which invests $3.3 billion in hedge funds for clients, said, “Things are much better than they were last year, when we had the lows in the market.”