Asset AllocationNovember 22, 2021

This Month’s Hedge Fund Performance Shows Significant Improvement From Q3

Smaller funds also seem to be outperforming larger funds in the long run.

Reported by Anna Gordon

Hedge funds have seen a lot of ups and downs in the past few months. According to Citco’s recent report, the company’s hedge fund clients delivered an overall weighted average return of 1.15% in the third quarter of 2021, compared with weighted average returns of 6% in the second quarter and 8.25% in the first quarter.

The Q3 downturn seemed to come primarily from less impressive returns in July and September, according the HFRI index, which compiles data on the performance of all hedge funds with at least $50 million under management. Funds with more than $10 million in assets under management (AUM) and at least 12 months of active performance are also tracked in the index.

However, October’s numbers seemed more promising, with both the fund-weighted HFRI and asset-weighted HFRI showing approximately 1.4% returns.

Don Steinbrugge, chairman of Agecroft Partners, a consulting firm that focuses on hedge funds, said the reason for the relatively lackluster Q3 performance was overall mediocre performance among stocks and bonds. “Big global equity markets were down, with the S&P down 0.6%,” he said. “And the fixed-income markets were flat. Therefore, the industry didn’t get the data tailwind.”

In the past five years, there has been a growing divergence between the performances of larger and smaller hedge funds, and that trend seems to be continuing this year. For 2021, the HFRI, the leading hedge fund performance index, is showing a significant gap between its asset-weighted index—which is weighted according to the AUM reported by each fund for the prior month—and its fund-weighted index—which includes all single-manager HFRI index constituents. The data through October shows the asset-weighted index logging an annualized return of 7.7%, while the fund-weighted index has seen returns of 11.22%. The gap was even larger in 2020, when the asset-weighted index returned only 2.19% while the fund-weighted index returned 11.83%.

Steinbrugge said he believes many of the larger hedge funds are struggling because they have difficulty optimizing such vast portfolios.

“Many have grown their assets well beyond the optimal size to maximize performance,” he said. “And, as a result, their alpha is diluted over a large asset base, which has negatively impacted performance.”