The numbers are truly terrible. Bank of America Merrill Lynch’s investible hedge fund composite index shows hedge funds are up 1.85% so far in 2012. That means investors in many hedge funds are paying big fees for the luxury of getting creamed by the U.S. stock market, which has returned 13.8% in 2012, at least as measured by the Standard & Poor’s 500 index. Goldman Sachs has put out a report showing that the average hedge fund is up 4.6% in 2012 and that only 11% of the hedge funds it tracks have beaten an ordinary S&P 500 index fund.
The big question is whether investors will overwhelmingly lose faith in hedge funds and start heading for the exits in a big way. So far they have only been creeping toward the door, although there are signs investor patience might be coming to an end. Reuters recently reported that a hedge fund administrator’s redemption indicator hit its second-highest level of the year in August and that big investors, like Citigroup’s private bank, in John Paulson’s prominent but struggling hedge funds have requested to redeem hundreds of millions of dollars. Man Group, the world’s biggest publicly-traded hedge fund, has seen its stock drop by 40% this year after its assets under management fell by almost a third.
Investors have stuck with hedge funds through rough times before and have shown they are willing to forgive one bad year. But 2011 was also a loser for most hedge funds. It was one of the hedge fund industry’s worst years ever, with the average hedge fund falling 5% while the S&P 500 returned 2%. Two bad years in a row might be tougher for some investors to accept.
