Some may find this a bit surprising. The magnitude of losses experienced by hedge funds on average during the height of the Eurozone crisis in 2011 was as large as the losses the industry witnessed during the financial crisis in 2008.
But unlike the performance after the financial crisis, the industry has been unable to shake the 2011 losses. Since the 2011 shock, hedge funds have been trending sideways for over a year now. Managers continue to find it extremely difficult to position themselves in response to the Eurozone madness. Many became short the various risk markets (or went into cash) this past summer and got hurt by Draghi’s action in late July (see discussion).
Numerous funds got involved in sovereign CDS – long protection – and took losses as CDS tightened (see discussion). Being short going into QE3 did not help either. Also a number of equity funds got hurt by a sharp sell-off in technology recently. The declines in commodities and emerging markets earlier in the year caused some funds to underperform as well.
The groups that did well have been some of the more specialised managers such as the Nile Pan Africa Fund (up 35% YTD) or DAFNA Lifescience (up 49%). But with yields at historical lows and macro risks still lurking, generating consistent returns (after high fees) has became extraordinarily tough for the industry as a whole.
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