The tide may be turning for the hedge fund industry

The hedge fund industry has had a tough run.

The average hedge fund has returned around 3% so far this year, according to Goldman Sachs, while the S&P 500 is up around 7%.

The hedge funds themselves have had a plethora of excuses for this poor performance, ranging from the size of the industry to its lack of diversity.

One of the recurring complaints is that they are all investing in the same things, which is otherwise known as crowding.

Crowding hasn’t always been a problem. It used to work. In fact, piling in to popular names has traditionally been a winning bet.

But since the tail end of 2015, indexes populated by crowded names have been dropping sharply, affecting a big chunk of the hedge fund industry. In an important development for the industry, there are signs that that is starting to change.

Goldman Sachs just published its hedge fund monitor report, and found that the performance of its hedge fund VIP basket, a group of stocks that are hedge fund favourites, has started to turn around. Here’s Goldman:

“From August 2015 through June 2016, the VIP basket lagged the S&P 500 by nearly 1500 bp (-17% vs. -3%), a period of historically poor weakness exceeding even the 2008 financial crisis. However, during the post-Brexit equity rally, the basket has begun to claw back, outperforming the S&P 500 by nearly 500 bp (+14.5% vs. +9.8%).”

And here is a chart showing the rebound:

That isn’t to say everything is fine and dandy in hedge fund land. Even with this rebound, performance is still underwhelming. Here’s Goldman again:

“Even with the recent rally in the most popular long positions, the average hedge fund has returned just 3% YTD, lagging the S&P 500 for the eighth year in a row. Many active managers continue to struggle in 2016, with the average large-cap core mutual fund also lagging the S&P 500.”

Still, the turnaround is a bit of good news during an otherwise challenging period.

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