This Is The Worst Year For Hedge Funds Since The Financial Crisis

It’s no secret that most hedge funds have had a particularly difficult year, and now that we have 11 months of data, it’s become clear that 2018 is the industry’s worse year since the global financial crisis. Between investor redemptions and performance-based losses, the hedge fund industry has shed 3.4% of its assets under management so far year to date, according to data from Eurekahedge.

Last year (2017) was the best year for hedge funds in a long time. According to data from hedge fund database provider Eurekahedge, which monitors the performance of 2,666 funds across the hedge fund landscape, funds returned an average of 8.45% in 2017, the best performance since 2013. But despite this performance, some of the industry’s biggest names have decided to close their doors this year.

​But somebody did very well. The world’s biggest hedge fund group, Bridgewater, said that its flagship fund delivered investors a 15% return in 2018 – a year where the US stock market returned a 4% loss.

Hedge funds aim to beat the market by both buying and “shorting” a variety of investments – including stocks, bonds, currencies, and commodities (anything from copper to soybeans). In late 2018, Bridgewater predicted that the US economy was cooling down and adjusted its investments accordingly – and it looks like that paid off.

Mega Swedish pension manager AP3 pulled some of its cash from hedge funds back in June, complaining of paltry returns. According to AP3, such funds only delivered an average annual return of 2% over the last 15 years – a mere 1% more than AP3 would have gotten from investing in much less risky US government bonds instead. Despite Bridgewater’s big win, it looks like AP3 made the right call: early data shows the average hedge fund lost 7% in 2018 (see above).

A hedge fund typically invests by taking a view on individual assets. It might, for instance, buy shares of Amazon – but not of the similar companies investors typically lump together with Amazon (its “index”). This selective strategy can let hedge funds win when the wider market tanks – if they pick the right assets, that is. By the same token, it’s tougher for hedge funds to make extraordinary gains when markets overall are rising and any old monkey can back a winner. Now, with the market’s halcyon days of mid-2018 but a distant memory, hedge funds might find it easier to generate value for their investors – and justify their high fees.