Remember a year ago, when half of the global investment community had concluded that hedge funds were an “asset class” that you absolutely had to have in your portfolio, fees be damned? So do we.
And remember a year ago when you also had to have funds of hedge-funds in your portfolio, because only these folks had the sophistication and experience to know how to pick out the few good hedge funds from the crap? So do we. (And what a bargain: Only 1% of assets and 10% of gains on top of the hedge funds’ 2% and 20%).
Well, not only did the global market crash reveal that many of these funds were swimming naked, it also revealed that the vaunted “hedge fund index” performance of the past decade–the annual return for this “asset class” that helped snooker thousands of pension funds and individuals into these funds–was a lie.
FT: The widely followed Credit Suisse/Tremont hedge fund index last week restated returns of market-neutral hedge funds to show a loss of more than 40 per cent for the year to date, instead of the 0.85 per cent return published earlier this month.
Oops. And, wait, doesn’t Tremont sound familiar? Why, yes–it was one of the largest fund of fund families to shovel money at Bernie Madoff.
CS/Tremont included two “feeder” funds that had placed money with Mr Madoff – Fairfield Greenwich’s Sentry fund and Kingate Global – in its market- neutral index. Market-neutral funds are designed to show low volatility and include so-called “quant” funds that use computer models to profit from small price discrepancies.
[There’s some good statistical work for you: Include two funds tied to the same fund in your “average.” No wonder academics have long taten the CS/Tremont index with a grain of salt.]
Other hedge fund indices may also have included Madoff-related funds in their benchmarks, which will mean hedge fund returns could be revised significantly lower. Hedge funds have registered their lowest annual returns in history.
CS/Tremont restated the returns of all hedge funds to show a loss of 4 per cent during the month of November, as opposed to a gain of 0.7 per cent as previously calculated.
For the year to the end of November, hedge funds were down more than 19 per cent, not 16 per cent as previously calculated, said CS/Tremont.
Catch that? A single hedge fund fraud just knocked the annual return on this “asset class” down 3 full percentage points this year.
It’s not clear what methodology CS/Tremont used to calculate this change. If the index just wrote $50 billion of assets to zero in one month, the 3-point hit would not recur in prior years. If, however, CS/Tremont is looking at this the way it should be–stripping out Madoff’s funds from the beginning–and STILL coming up with a 3-point hit, long-term hedge-fund returns will have to be reevaluated.