Hedge Funds Lagging S&P 500 by Nearly 11%

A Bank of America Merrill Lynch estimate puts hedge funds’ year-to-date returns at 3.04%.

(October 1, 2012) – Hedge funds, in aggregate, have returned nearly 11% less than the S&P 500 for the year-to-date as of September 26, according to a Bank of America Merrill Lynch report. 

“Could the underperformance be cyclical or is there a structural change that has changed the return structure of returns for the hedge fund industry?” Mary Ann Bartels, head of technical and market analysis for the bank’s research arm, asked in her report. “We continue to conclude as in prior research, there [are] likely too many hedge funds chasing few returns.” 

The roughly 8,300 active hedge funds have returned an average of 3.04% for the year-to-date, according to the report, lagging far behind major public equities indexes. The S&P 500, for instance, has gained 13.97% in the same period. 

This is the third worst-performing year since a pre-merger Bank of America began tracking hedge fund performances in 1994. 

Convertible arbitrage funds, which simultaneously buy convertible shares and short common stock in a certain firm, were the best performers, with average returns of 5.58%. Event driven funds came in second place with gains of 4.99%. The worst-in-class? Hedge funds following market neutral strategies—those seeking to profit on the way up and down in a single equity market—which lost 5.31% in the year-to-date. 

Institutional investors have been enjoying US equity markets’ aggressive rally over the last year—and the fact they don’t have to pay 2-and-20 on those gains.