The Hedge Fund Problem -- and the Solution

Date: Thursday, December 12, 2013
Author: Adam Johnson, Bloomberg

Hedge funds have a problem... and we have a solution.

Equity hedge funds are significantly lagging the S&P 500 this year, according to data tracked by www.hedgefundresearch.com on over 7,000 funds globally.

 

While we recognize hedge funds hedge (meaning they offset long exposure with short positions), lagging by 16.8 percentage points represents significant underperformance. Investors aren't paying fees of 2 percent of assets under management and 20 percent of profits to trail this badly.

With three weeks left to generate returns and keep investors from pulling assets, we offer hedge funders and blog readers alike the following insight from our oft-quoted friend at www.strategasrp.com, Chris Verrone:

 

Ah-ha... the Catch-up Trade... Buying the year's winners into December hoping to capture incremental return. We admit momentum is a fickle friend, but it has its place. So we narrowed the S&P 1500 to 35 stocks which doubled through September, and found just 15 which have added another 15 percent since then.

 

Some of these companies are in the news; most are not. This is because we chose to include small- and mid-capitalization stocks in our analysis.

 

Three additional names narrowly missed our list. They also doubled in the first nine months, but are "only" up 11 percent to 14 percent since September. We share them with blog readers exclusively: Best Buy Co. (BBY), Financial Engines Inc. (FNGN) and WageWorks Inc. (WAGE).