Can Hedge Funds Survive Bernanke?

Goldman Sachs Group Inc. published a chart today comparing the performance of hedge funds that invest in equities with the major stock-market indexes. Based on Goldman's research, the average hedge fund is up just 5.4 percent so far this year. During the same period, the Standard & Poor's 500 Index has risen 15.4 percent, and the average mutual fund has gained 14.2 percent.

 

This kind of subpar showing surely can't sit well with investors who shell out as much as 20 percent of their gains to the fund manager, who also collects a fee that can be as much as 2 percent of the assets under management.

There could be any number of explanations for why hedge funds have done so badly. Goldman says many hedge funds bet against stocks such as Johnson & Johnson, expecting them to fall. They rose instead.

Then there's the lack of volatility. Hedge funds often profit from discrepancies in prices between related assets, and these tend to shrink during calm periods in financial markets.

Based on one of the most widely watched measures of stock-market volatility, the VIX Index, we're in the equivalent of the horse latitudes. The VIX recently registered a read of about 13, compared with a high of almost 90 at the peak of the financial crisis in October 2008 and more than 40 in the summer of 2011, when worries peaked that Greece might exit the euro monetary union. The VIX has been a snore this year, bouncing between 12 and 18.

The biggest reason for the market tranquility might be the Federal Reserve's repeated assurances that it will maintain zero interest rates and provide monetary stimulus until the economy recovers, and unemployment ebbs.

That may just account for the recent flurry of stories about how much hedge-fund managers hate Fed Chairman Ben Bernanke. He's putting them out of business.

(James Greiff is a member of the Bloomberg View editorial board. Follow him on Twitter.)