Hedge Fund Performance
Hedge funds in the finance sector have performed dismally as one of only two hedge fund benchmarks to have a negative performance. A recent report by Hedge Fund Net shows that although finance sector hedge funds have not shown great numbers when compared to other hedge funds, they have “outperformed their closest benchmark by more percentage points than any other equity related hedge fund sector in the last twelve months.” Also, if you take into consideration the harsh conditions that exist in the finance sector—the housing bubble and the looming economic recession—these hedge funds have performed relatively well.
The HFN data demonstrates that finance sector hedge funds have showed signs of improvement. Total assets have risen by $6.1 billion just in 2007, but this spike occurred mostly in the first two quarters and was followed by an estimated $2.4 billion redemption by investors. Although the rise in total assets is promising, it is overshadowed by the fall in the finance sector’s organic growth rate. The organic growth rate (rise in total assets excluding performance) in 2006 was 57.9% and a significantly smaller 5.1% in 2007.
Two differences that have had an immense effect within the finance sector hedge funds are regional focus and fund size. The impact that the housing market collapse had on the U.S. finance sector was dramatic—funds within the United States experienced a major fall in performance of -6.01% in the last twelve months. The sector is now showing signs of recovery within the U.S.; however, in the last funds focused in Europe and globally are experiencing a delayed decline. The other difference among finance sector hedge funds is size. Those funds with a smaller AUM have shown significantly weaker performance than those in with 500mm or more. Funds within the $20-$100mm range produced the lowest median return of any other group, even worse than those funds under $20mm.
As for the future, the HFN report suggests that finance sector hedge funds are facing a tough outlook. If they manage to survive the housing market and credit bubbles they will be met with positive net interest margins in the banking sectors. As long as the finance hedge funds act wisely—by identifying new sources for outstanding returns while avoiding more bubbles—these funds may be able to ride out this recent overall weak performance, but it won’t be easy.
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