Hedge Funds Set to Underperform Stocks This Year

According to Bloomberg.com (link below), the hedge fund industry is set to post its worst annual performance relative to stocks since 2005, as well as its fifth straight year of underperformance relative to stocks.

Through November of this year, the $2.5 trillion hedge fund industry had achieved returns of 7.1%, while the S+P 500 had returned 29.1% over the same period of time.

According to Bloomberg, the last time that hedge funds outperformed the market was back in 2008, when the hedge fund industry lost 19% compared to a 37% decline for the S&P 500. Since that time, the S&P 500 has beat the hedge fund industry by a total of 97 percentage points.

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The true nature of a "hedge fund" is to generate a decent return while enjoying a combination of long and short positions - this allows a hedge fund to remain hedged against the moves of the market. So, thanks to record low interest rates, investors have been plowing their money into the markets and driving the DJIA, S&P 500 and NASDAQ to dizzyingly high levels. Hedge funds, which generally try and have a mix of long/short exposure, are having a very hard time keeping up.

Many hedge funds entered 2013 expecting that the Federal Reserve would start "tapering" their monthly bond purchases. This action, they figured, would start to slow down the ferocious run that equities had been on. Well, the tapering hasn't started as of yet, and equities have continued to fly.

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Don't feel too bad for the hedge fund industry, though, as they are expected to rake in $50 billion in management fees this year alone.

Source: Bloomberg.com - Hedge Funds Trail Stocks by the Widest Margin Since 2005

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