Do Hedge Funds Suck?

We got off a call with an investor the other day who mentioned that the past two+ years have been a great microcosm of different full cycle market environments – with:

  • 2018 = SPY -4.56% = a down stock market in 2018, including the volatility explosion in Feb of 2018 and odd sell off with no corresponding volatility spike in Dec of 2018
  • 2019 = SPY +31.22% = a screaming higher rally in stocks in 2019 and resulting crush of volatility
  • 2020 = SPY -4.87% (as of end of May) = a generational, historically sharp sell off and volatility spike, with nearly as quick snap back to even on the year


If ever there was a time to analyze how your investment choices are doing in terms of risk profile, ability to earn a return, and diversification properties – this 30mo period sure has been a good look.

Which brings us to the nearly $3 Trillion in global hedge fund assets. Yes, that’s Trillion with a “T”.  How have hedge funds performed during this down/up/down/up period?  We’ve been the first to say to the many media articles trumpeting how hedge funds have under-performed the S&P 500 that they don’t care – they are bananas, and you’re talking oranges.


BUT… forget the generalities. What do the stats actually look like. We pulled the monthlies for Credit Suisse’s various hedge fund indices to dig into the math a little. Let’s start with just returns, as the press likes to do:

We agree – hedge funds appear to really suck by this measure, not just trailing by basis points, but an order of magnitude worse. Or even the completely opposite sign (looking at you equity market neutral and event driven). A closer look shows 2019 to be the main culprit, with the main hedge fund index outperforming by losing slightly less in the down periods of 2018 and 2020, but under-performing A LOT worse when stocks were up. For just 1/3 of the upside, we would expect them to have much less of the risk as well. So what do the risk metrics look like the past 30 months:

Alright, now this is getting to the more nuanced part of the calculus. Stocks are the MOST risky asset across these indices, with about double the worst drawdown and triple the volatility of the main hedge fund index (2nd column).  While hedge funds were once considered wild, exciting, volatile ways to make more money – this shows they have become (on average) less risky, less volatile investment choices. As we said in a 2018 post:

..that’s why there’s $3 trillion dollars invested in hedge funds. It’s not about the headline number or absolute performance compared to stock indices. Hedge funds are given mandates and expected to exist within tight drawdown and volatility bands by investors. They are employed for specific purposes and mandates which involve much more than just return – and generally speaking – are way more concerned with controlling risk. Scratch that. It’s not just controlling risk, It’s about delivering an expected risk. That’s something a passive investment in the stock market can’t do. We can’t ask the S&P to just give us a 10 vol next year. But alternatives can and do.  [which] allows the investor to set the risk to whatever they are comfortable with…

But, but, but… that risk control came at a steep price of just 1/3 of the upside, or 700 basis points in compound return when compared to the main hedge fund index. You may be willing to take on a little more risk for that extra 7% in return. Which is the whole concept behind risk weighting and analyzing risk adjusted ratios to see who is better on a risk adjusted basis. We can do a simple exercise and say that at an equal risk weighting (multiplying the hedge fund index by the annualized vol difference of 2.78), the hedge fund index would have an annual return of 1.28%. Problem is, that’s still well short of the 7.5% number from the SPY, leading us to believe the risk adjusted returns likely won’t make a great argument that hedge funds don’t suck. Here’s the return over drawdown (MAR) and return over volatility (sharpe) ratios for each over the past 30 months:

Ok, the SPY is absolutely crushing the main hedge fund index even on the risk adjusted basis, putting some major bullet holes in the boat holding the “yes, hedge fund under-perform on an absolute basis, but they outperform on a risk adjusted basis” theory. But at least we have some hedge fund strategies showing up to the party here, with Global Macro, convertible Arb, and multi-strategy at least in the conversation for similar risk adjusted performance. It’s likely no coincidence that those are three of the more non-correlated hedge fund starts to equities.

So now what? Do hedge funds suck?  Will the $3 Trillion soon be $2.5 Trillion on its way to $500 Billion someday as investors flock into the better risk adjusted returns of pure stocks. In short…. No way. There’s no putting this genie back in the bottle, and there’s no shortage of investors who don’t believe the S&P 500 or any other stock index will NOT be the best risk adjusted performer over the next three years, or even ten, or twenty, or forty (see Japan 1980 to 2020 for more on that possibility). And in fact we see that argument in the past thirty months of data. We see that argument if we remove the 2019 performance from the analysis, and just look at the volatile down and up periods. Here’s the risk adjusted returns when we remove the banner year for stocks:

Without their huge year (which, admittedly, is a little like saying… besides that, Mrs. Lincoln – how was the play?). But without that huge year – the hedge fund indices are nearly all better risk adjusted performers. And that’s what investors are looking at. That’s what investors are buying. They have stock exposure. The desire to invest in hedge funds is typically not a binary choice – stocks or hedge funds. It is typically a combination – stocks and hedge funds, for this very purpose, to provide a different, better risk adjusted return during volatile times when

TLDR = yes, hedge funds suck….. in comparison when equity markets see a 30%+

The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The programs listed here are a sub-set of the full list of programs able to be accessed by subscribing to the database and reflect programs we currently work with and/or are more familiar with.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.