Too bad not every hedge fund can be long Apple (even if as Goldman points out, they sure are trying - "One out of five hedge funds has AAPL among its ten largest long positions" - a truly stunning observation and one which means that if Apple, which is priced to absolute perfection, has even one hiccup, we would see an absolutely epic bloodbath in the market). Because if 2011 was a horrible year for hedge funds which closed the year well below, or -10%, their respective benchmark - the S&P (unch for the year), the last thing hedge fund LPs can afford is another year in which they pay 2 and 20 to generate a return lower than the S&P. Yet to their horror, this is precisely what is happening.
According to Goldman's latest Hedge Fund Tracker, "The typical hedge fund generated a 2012 YTD return of 3% through February 10th compared with 7% gains for both the S&P 500 and the average large-cap core mutual fund." Yes, there are outliers, but far and wide this means that even more redemptions are about to hit the hedge funds space, where jittery investors will no longer show any restraint before sending in that redemption letter. It gets worse: "The 60-fund Dow Jones Credit Suisse Blue Chip Hedge Fund IndexSM has returned 3% YTD, in line with our sample average.... The distribution of YTD performance indicates that 50% of hedge funds have generated returns between -2% and +2%." And the absolute kicker: "Only 10% have returned more than 7%, outperforming the S&P 500." Another way of saying that is that 90% of hedge funds are generating negative alpha! If that is not the signed, sealed and delivered notice of death of the hedge fund industry courtesy of not ubiquitous central planning, we don't know what is.
What is causing the drag? Don't laugh: "Fund hedges have created a drag on performance - Despite finding success with their top picks, lack of net exposure to the cyclical rally has caused hedge funds to lag both the S&P 500 and the average large-cap core mutual fund so far in 2012. Hedge fund net long exposure rose to 46% in 4Q 2011 vs. 36% at the end of 3Q 2011, but remained below the 50% net long exposure one year earlier in December 2010." In other words: want to outperform the market, why don't hedge of course. Just put all your money in central planning, and in the faith that diversification is meaningless, and that Ben Bernanke and his cohort of clueless academics can take the world from Insolvent point A to perfectly Solvent point B.
Showing this shocker visually for 2012 YTD:
2011 is already well-known, but here it is again: