As we and plenty of others have documented extensively, the allure of “rockstar,” coke-sniffing, Hamptons-dwelling, hedge fund managers is disappearing rapidly in a world where trying to beat benchmarks means trying to figure out how to outperform a broad market that’s backed by $400 billion in quarterly central bank liquidity flow.
Simply put: the “2 and 20” model is on life support as fund managers try to adjust fee structures in order to ensure the survival of the industry. “Hedge funds have been facing an investor revolt over high fees after years of lackluster returns, drawing criticism from some of the top names in finance,” Bloomberg wrote late last month, adding that “even well-established managers are making more concessions under pressure from investors.”
On Friday, BofAML was out noting that although the optics are certainly “challenging,” hedge funds’ risk-adjusted performance is improving.
Hedge Fund strategies are supposed to deliver better risk adjusted returns. At least that’s the the initial promise of being “hedged”, i.e. to navigate downside risks.
After several challenging years following the financial crisis, the risk-adjusted performance of hedge funds, measured by sharpe ratio, is improving. As of the end of February 2017, hedge fund delivered sharpe ratio of 3.8 over the trailing 12 months, compared to 1.3 by the S&P 500. Distress Credit, Convertible Arbitrage and Event Driven lead.
More importantly, hedge fund also delivered better sharpe ratio of 0.84 over the trailing 3 years, compared to 0.66 by the S&P 500. Merger Arbitrage and Equity Market Neutral lead over the three year time horizon. Meanwhile, hedge funds still trail the S&P 500 on annualized geometric average returns.
Why do we get the feeling no one will care?