The hedge fund industry has been taking a lot of heat in recent days and years for delivering poor performance at a high cost.
Indeed, according to a recent report from Goldman Sachs, the average hedge fund returned a measly 2.5% during the first half of the year compared to the S&P 500 which returned 12.6% (13.8% including dividends).
It’s worth noting that hedge funds often consist of both long and short positions. Short positions lose value when the asset price goes up. Some hedge funds take these long and short positions so they can be neutral on the direction of the stock market.
According to Goldman’s analysis, much of the hedge fund industry’s underperformance is attributable to these short positions.
In fact, the hedge funds’ large long positions have actually outperformed the S&P 500, which is a pretty incredible feat.
Here’s Goldman Sachs’ David Kostin:
Interestingly, hedge fund long stock positions have actually delivered solid returns in 2013. Our Hedge Fund Very-Important-Position (VIP) List has returned 14% YTD (Bloomberg ticker: <GSTHHVIP>). The basket consists of the 50 stocks that “matter most” for hedge fund returns in terms of weight in a typical hedge fund portfolio. Unfortunate selection of short positions has hampered hedge fund returns. 26 of the 50 Russell 3000 stocks with a market cap of at least $1 billion and the most short interest as a percentage of market cap posted returns of more than 20% during 1H 2013.
Here’s Goldman’s chart showing the distribution of returns for hedge funds and mutual funds.
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