The highest earning hedge fund managers of recent years
Even the big, well known managers can slip up and having their own “skin in the game”, i.e. their own capital on the table is also no guarantee of being wrong footed by the market.
Truth is, as the industry grew and more fund managers entered the game, the quality of the hires reduced and many were nothing more than traditional long only managers riding the hedge fund boom. Time and volatile markets has exposed the aggregate of these managers.
In a prime example of how the market is no respecter of pocket depth and in fact feed of “hubris”, look at “Mr Subprime” John Paulson’s flagship fund, for example, which returned huge profits at the beginning of the financial crisis due to his outsized bets on the US housing market, but then sank an astonishing 50% in 2011 and an extra 15% last year — both years when the S&P 500 rose.
Looking at HFRX index, a widely used measure for hedge funds’ global performance, returns of +5.2%, -8.9% and +3.5% have been posted for the last three years, whilst the S&P 500 has delivered 0%, +12.8% and +13.4% in the same period — a collective underperformance measure of 26.4%! Whilst it is a tenable excuse that true hedge funds weren’t made to outperform the S&P 500, their primary aim being capital preservation over the long haul (hence the name “hedge”) through protecting the downside risks to capital in bear markets, again, unfortunately for the industry the historical record does not bear this out with the index falling heavily during the twin big bears of 2002-3 and of 2008-09.
“Truth is, as the industry grew and more fund managers entered the game, the quality of the hires reduced and many were nothing more than traditional long only managers riding the hedge fund boom.”
Many hedge fund managers are laying the blame for their sustained underperformance in recent years squarely at the door of Western governments and central banks for distorting the market with too much intervention in the form of quantitative easing, short bans, currency floors etc... They may in fact be right that it is making it difficult for them to exploit under and overvalued opportunities. Problem is, they underperformed before the manipulation... In the absence of an updated list for 2012, let’s take a look at Forbe’s list of the highest hedge fund earners for 2011.
One should certainly think twice before entrusting your hard earned cash with many of these fund managers who ask for hefty fees even before they have performed; with a 2% annual fee being typical unlike the traditional fund management industry that more typically charges around 1.25% and some trackers even less.
March 2013
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