A Bad Or Good Year For Hedge Funds?

A story that moved over the Reuters wire last night suggests that 2006 was a pretty good year for hedge funds:

Hedge funds that specialize in emerging markets rose 20.49 percent in 2006, according to new data, reminding investors of the out-sized returns that made these loosely regulated portfolios famous just a few years ago. . . . Overall, the average hedge fund returned 13.86 percent, a little more than the Standard & Poor's 500-stock index of large stocks, which rose 13.6 percent.

Reuters source for this was Credit Suisse's Credit Suisse/Tremont Hedge Fund Index. But then we read that "Last week, Hedge Fund Research Inc., the first company to report industry data, said the average hedge fund gained 12.99 percent."

So which is it? 13.86% or 12.99%? That's a significant difference, when you consider the sums of money involved.

In fact, Reuters didn't report that the Hennessee Hedge Fund Indices showed an even lower number for average fund performance, 11.36%. Hennessee found that emerging market funds climbed 13.18%, a staggering seven percentage points lower than the Credit Suisse/Tremont numbers.

Reuters also didn't report that the Hennessee numbers showed that just 21% of hedge funds beat the S&P 500. Or, to put it another way, that 79% didn't beat the market. I think that is pretty significant, particularly when you consider that none of the fund styles in the Hennessee index managed to beat the market.

In years like this, fund managers scoff at the S&P as a proper benchmark and say that they focus on "risk adjusted returns" and "absolute returns." A gent from the fund industry made that point last night, in a discussion I had with him on CNBC's On the Money. But in years when they beat the market, hedge funds embrace the S&P to their collective bosom.

The media, I think, needs to be a bit more forthright in reporting on hedge fund industry performance. The press needs to emphasize that none of the hedge fund indexes are particularly reliable, as their contradictory numbers indicate. That's because only hedge funds that wish to do so actually report their performance. That may skew the results positively, or negatively, but I am sure that it does skew the indexes.

© 2007 Gary Weiss. All rights reserved.

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