The Future of Hedge Funds
J.C. de Swaan of Princeton University recently wrote a cover story on hedge funds for Caijing, the Chinese business/financial magazine. We are grateful to J.C. de Swaan for his permission to republish the article in English for the benefit of our readers. Excerpt:
What a difference a year makes. Between 1989 and the end of 2007, hedge funds returned an annual average of 14%, with some hiccups, but none worse than one down year in 2002 with a negative average return of 1.5% when global markets were down 21%. Even in 1998, when Long-Term Capital Management (LTCM) famously collapsed, hedge funds generated positive returns on average.
2008 proved cataclysmic. Hedge funds returned an average negative 18%, according to Hedge Fund Research. The poor performance was pervasive across strategies, except for Global Macro strategies, up an average 5%, and those that had a short bias, up an average 29%. Almost every other strategy ended the year in the red, with Convertible Arbitrage posting the worst performance, down an average of 35%. Emerging markets performed worse than the developed world, with Asia ex-Japan focused funds down an average of 34% and Russia/Eastern Europe focused funds down an average of 58%. Weak performance also carried across hedge fund sizes, humbling many of the most storied managers.
Performance of selected hedge fund strategies (Percent annual returns)
| Strategy | 2004 | 2005 | 2006 | 2007 | 2008 |
| Event-driven | 15.0 | 7.3 | 15.3 | 6.6 | (21.3) |
| Macro | 4.6 | 6.8 | 8.1 | 11.1 | 5.2 |
| Relative-value | 5.6 | 6.0 | 12.4 | 8.9 | (16.8) |
| Convertible arbitrage | 1.2 | (1.9) | 12.2 | 5.3 | (34.7) |
| Fixed income - Corporate | 10.5 | 5.3 | 10.8 | (0.7) | (21.7) |
| Fund composite index | 9.0 | 9.3 | 12.9 | 10.0 | (18.4) |
| Fund of funds composite index | 6.9 | 7.5 | 10.4 | 10.2 | (20.7) |
Source: Hedge Fund Research