Hedge Funds Keep Failing to Deliver on What They’re Selling
They neither outperform in bull markets nor offer insurance against bear retreats.
Bloomberg, April 25, 2019
The stark underperformance of hedge funds and others in the alternative-investments business since the end of the financial crisis has been a long-running mystery. Or as Worth so starkly put it, “What the Hell Happened to Hedge Funds?”
Perhaps the most compelling theory for underperformance has been the long steady gains in markets since the financial crisis. Some credit — or blame — the Federal Reserve’s dual policies of quantitative easing and zero-interest rates with creating a low volatility environment. That combination, goes this argument, has worked mightily against hedge funds. There’s little need for a hedge in this sort of manipulated and remarkably calm bull market, is the complaint from numerous underperforming managers.
Once things normalize, the argument went, it would be a different game. The return of volatility would give hedge funds the opportunity to resume the outperformance of their glory days. Much more attractive numbers were inevitable.