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The tide may be turning for the hedge fund industry
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(High tide at a seafront in Mumbai in 2014.Danish Siddiqui/Reuters)
The hedge fund industry has had a tough run.
Hedge funds on average have returned about 3% this year, according to Goldman Sachs, while the S&P 500 is up by about 7%.
The hedge funds themselves have had a plethora of excuses for this poor performance, including the size of some industry players and the industry's lack of diversity.
One of the recurring complaints is that hedge funds are all investing in the same things, in a phenomenon 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, however, there are signs that is starting to change.
Goldman Sachs just published its hedge fund monitor report, and it found that the performance of its hedge fund VIP basket, a group of stocks that are hedge fund favorites, had 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:
(Goldman Sachs)
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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