Hedge Funds Still In A Rut As Industry Records Further Monthly Declines

Mark Shapland

8 May 2014

Hedge funds took another pounding in April as the industry recorded back-to-back monthly declines for the first time in two years.

Poorly performing technology stocks and a tough trading environment overall were to blame, according to the latest data from researcher Hedge Fund Research .

On average, hedge funds recorded a decline of 0.17 per cent for April and follows the 0.33 per cent decline in March. The industry performed particularly badly on the equity front, with the HFRI Equity Hedge Index recording a fall of 0.7 per cent despite the the S&P 500 rising 0.74 per cent in April.

On top of this, the HFRI EH: Technology/Healthcare Index posted a sharp decline of -3.7 per cent, the worst monthly decline since the index fell 6.1 per cent in October 2008.

“Technology exposure continues to be an important cornerstone of hedge fund performance generation, with significant, core holdings across large cap and early stage ventures, and the commitment of the hedge fund industry to the technology space will not be affected by recent volatility,” said Kenneth Heinz, president at HFR. “Not only have technology-focused hedge funds posted annual gains in each of the past 5 years, but have outperformed both the S&P 500 and Nasdaq Composite since the beginning of 2007, with less than half of the volatility.”

The latest data is a big blow for an industry that charges huge fees and promises big returns. Clients are beginning to wonder if the "2 and 20" charging model - that sees hedge funds collect a 2 per cent management fee and 20 per cent of investment profits - is worth it.

It follows news that the industry has recorded its worst start this year since 2008 - when the world was on the brink of recession. In the first quarter, the All Hedge Fund strategies benchmark gained a measly 1.23 per cent for the period, compared with returns of 6.07 per cent and 3.76 per cent respectively in 2012 and 2013 respectively, according to research firm Preqin.

Preqin said yesterday that the UK remains the hedge fund capital of Europe. The UK is the most prominent country in terms of hedge funds being launched in Europe, representing 50 per cent of all known European hedge fund launches in 2013 and 2014.