Wednesday, December 12, 2012

Mark Hulbert Skewers Hedge Funds vs. Market Letters

From MarketWatch:

Investment newsletters beat up hedge funds in 2012
Commentary: Hedge funds are having a mediocre year at best
The cult of the professional is alive and well on Wall Street. Be careful that you don’t buy into it.

Just take the contrast between hedge funds and investment newsletters. The former occupy a rarefied corner of Wall Street, supposedly filled with the best and the brightest. Only qualified, high-net-worth investors are even allowed to engage their services and most individuals feel deprived that they don’t have access. 

At the opposite end of the spectrum are investment newsletters, supposedly edited by a bunch of lunatic self promoters whose research departments are no bigger than their kitchen tables. This is the domain of the small, individual investor.

Well, guess what? The newsletters this year are handily beating the hedge funds. The average newsletter, according to the Hulbert Financial Digest, has produced a year-to-date gain (after transaction costs) of 9.0% — after taking transaction costs into account. 

In contrast, the average hedge fund, as measured by the Hennessee Hedge Fund Index, has gained 5.5%. (These numbers are through November.) 

To be sure, longer-term data paint a somewhat better picture of the hedge fund world — though not sufficiently better to justify an inferiority complex on the part of newsletter editors or retail investors. 

Over the last decade, according to the Hennessee Group, the average hedge fund has produced a 6.6% annualized return, versus 6.3% for the average investment newsletter. That’s a surprisingly small difference, given the stark differences between the two categories of advisers. 

Naturally, the hedge fund world believes that raw performance numbers fail to capture the true value that is being added by hedge funds. One major category of value added, they argue, is reducing volatility. After all, that’s the reason they are called hedge funds. 

But how much volatility are they really reducing? 

Again courtesy of data from the Hennessee Group, I was able to measure the extent to which the average hedge fund is correlated with the overall stock market, as measured by the Wilshire 5000 index....MORE
Now serving fund-kabobs.