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SCMP Reporter

Hedge funds this year have proved they are not paper tigers by comprehensively beating stock benchmarks. Hedge and other actively managed funds have come under assault from index-fund proponents who claim passively managed trackers outperform while incurring lower fees. They have the figures to back that up too.

 However, for the year to the end of November, the hedge funds have it, according to figures from Van Hedge Fund Advisors International.

 For the period, offshore hedge funds returned 25.6 per cent on average, net of fees, against 14.3 per cent for the S&P 500 US stock benchmark and 14.4 per cent for the MSCI World Equity Index.

 For November alone, hedge funds were up 5.7 per cent against 2 per cent for the S&P and 2.7 per cent for the MSCI index, reported Tennessee-based Van.

 Van, which advises on hedge-fund investments, uses returns from at least 450 hedge funds to draw up monthly figures.

 'Over 80 per cent of the funds in our indices posted gains in November, with over 60 per cent beating the S&P 500,' said chairman George Van.

 Perhaps most interesting for investors is that Van breaks down hedge-fund returns by strategy. The top performers by far were hedge funds in the aggressive-growth category, investing in stocks expected to show strong profit or revenue gains. They returned 54 per cent for the year to the end of November. Next were emerging-market hedge funds with 41.6 per cent and then fund of funds with 30.6 per cent.

 In a year of soaring or recovering stockmarkets, doom merchants did the worst, with short-selling hedge funds returning minus 5.1 per cent to the end of November and minus 9.1 per cent in November itself.

 Surprisingly in a year when aggressive growth was the top performer, hedge funds which focused on value stocks also did well, returning 23.1 per cent for the year to the end of November.

 Free-ranging macro funds of the type exemplified by George Soros and Julian Robinson did less well, however, returning 12 per cent for the year to November, underperforming the benchmarks by a couple of percentage points.

 While this year has been good for hedge funds, Van's figures show they have underperformed against the benchmarks for the five years from 1994 to last year.

 Offshore funds produced a net compound annual return of 6.4 per cent in the period, against 24.1 per cent for the S&P and 13.9 per cent for the MSCI World Equity Index.

 Last year was a particularly poor one for hedge funds, with average returns of minus 1.5 per cent against 28.6 per cent for the S&P and 22.8 per cent for the MSCI.

 For the five years to last year, aggressive growth was the top performing hedge-fund strategy with net annual returns of 16.8 per cent.

 The worst strategy over the period was short-selling, which gave annual returns of minus 6.1 per cent.

 Hedge-fund supporters will no doubt blame the underperformance over the five years to the diversity of strategies they cover acting as a drag. In contrast, the benchmarks have soared in one of Wall Street's biggest bull markets.

 Perhaps the true trial of strength between index funds and hedge funds will come when the Wall Street locomotive finally runs out of steam and investors and money managers have to engage their grey matter before deciding where to place their cash.



Don't write off hedge funds