The seemingly never-ending stream of negative headlines relating to global hedge funds is at odds with the reality of the Australian hedge fund sector. This not only relates to performance and risk (surely the most important measures for any investor) but also to size, liquidity, availability and fees.
Most recently there have been reports that this underperformance will lead to the age of multibillion-dollar hedge funds drawing to a close. The reality is that there are very few multibillion-dollar hedge funds in Australia, and while performance varies significantly from fund to fund, as a whole their performance has been in line with expectations.
According to a report by Goldman Sachs, global hedge fund performance lagged the S&P 500 by approximately 10% over the past year, and as at the end of June hedge funds had gained just 1.4% in 2013. By comparison, Australian based funds investing in global equities returned 16.52% (net of fees) in the 12 months to June, against the S&P 500 which returned 17.58%. That's a marginal underperformance of 1%, but achieved with a much lower volatility.
Hedge funds are continually reported as being illiquid, with redemption terms frequently running between three months and one year. By comparison over 95% of all Australian-based funds have liquidity of one month or less, and 50% of those have daily liquidity.
Most recently there has been considerable comment, much of it negative, regarding the SEC's decision to permit US hedge funds to advertise to the general public. In Australia all funds have to be registered or licensed with ASIC, increasingly offering better transparency and investor reporting than many traditional "long only" funds.
Hedge funds might not be suitable for all investors, and their depth and breadth of strategies and risks certainly require additional research, understanding, and due diligence. Once that's done however, the best funds provide outstanding performance with significantly lower volatility than traditional managed funds.
Chris
CEO, AUSTRALIAN FUND MONITORS
