"This is a make-or-break year for hedge funds. If they have another low-to-zero return year then you will have had a three-year cycle of very low absolute returns," so says the head of hedge fund allocations at a major investment firm to Reuters.
It was not a great year for funds in aggregate. The average hedge fund fell 5.2 percent, according to Hedge Fund Research, while the S&P 500 index rose 2.09 percent.
"The losses made 2011 the second negative year in four – funds fell 19 percent in 2008 during the worst of the credit crisis as markets tumbled and prime brokers cut back borrowing. In 2010 the average fund gained 10.3 percent, although this lagged the S&P's rise."
But it's doubtful that allocations to hedge funds in aggregate will be affected much by performance issues. The fact is that big institutions are near-desperate for gains that they have no choice but the keep plowing funds into alternatives. I expect hedge fund aggregate assets to continue to soar from the current .1 trillion level. However, there will be plenty of angst at individual funds and funds of funds.
If funds cannot maintain strong performance numbers, they will surely find themselves off the shelf. More lenient redemption policies in general will make such transitions easier. So far, the industry has fared well in 2012 from a performance perspective. I can only hope, funds can keep it up.
- here's the article