How does the S&P 500 performance compare to hedge funds?
Reality Check: S&P 500 Outperforms Hedge Funds π
Not only did the average multistrategy return trail far behind the tech stock-powered 24% gain of the S&P 500 in 2023βthe 4.9% multistrat average trailed the typical hedge fund and even the 5% return that one could recently get risk-free from a Treasury bill.
If your market outlook is bullish, you will need a specific reason to expect a hedge fund to beat the index. Conversely, if your outlook is bearish, hedge funds should be an attractive asset class compared to buy-and-hold or long-only mutual funds.
Historical studies show that as hedge funds tend to perform well during periods of high, stable interest rates, survey respondents have upgraded their return targets since 2022 to 9.06% from 7.45%, marking the highest such level in more than 10 years as they expect moving into a high stable rate environment.
The 20 leading funds made $67 billion in investor profits in 2023, up from the $65 billion recorded during the pandemic-era rally of 2021, according research Monday from LCH Investments, a fund of hedge funds. That's also around triple the $22.4 billion fund managers earned for investors in 2022.
While no single sector will beat the broad-market index all the time, investing in sector ETFs can pay off. With geopolitical tensions in the world, defense stocks are up this year, and that has made the Global X Defense Tech ETF (SHLD -0.18%) a winner.
The bottom line
Hedge funds and index funds take almost diametrically opposed approaches to investing. Hedge funds use active management strategies to try and beat markets, though they often don't succeed. Index funds seek merely to match a benchmark with a low-cost, passive approach.
Reality Check: S&P 500 Outperforms Hedge Funds π
Data shows that hedge funds consistently underperformed the S&P 500 every year since 2011. The average annual return for hedge funds was about 4.956%, while the S&P 500 averaged 14.4%.
Hedge funds are more suited to wealthy individuals and large institutions with higher tolerance for risk, while index funds are designed to appeal to average investors. High-net worth clients are generally presented with a number of investing opportunities and ways to do so.
The 2 and 20 is a hedge fund compensation structure consisting of a management fee and a performance fee. 2% represents a management fee which is applied to the total assets under management. A 20% performance fee is charged on the profits that the hedge fund generates, beyond a specified minimum threshold.
What is one disadvantage of a hedge fund?
Some of the disadvantages of investing in hedge funds include high fees, lack of transparency, and higher volatility. Hedge funds can also be more complex and harder to understand than private equity investments.
Citadel has generated roughly $74 billion in total gains since its inception in 1990, making it the most successful hedge fund of all time.
According to the data, hedge funds collectively outperformed the broader stock market during down months in the last four recessionary periods (acknowledging that the most recent, two-month-long, COVID-fueled recession contained only one month of equity decline β albeit steep).
Overall, the consensus is that hedge funds will continue to grow but will adapt to lower fees, greater use of technology, and increased access to retail investors.
As we turn our attention to 2024, the market environment should provide hedge funds with many investing opportunities. Managers will have to navigate macroeconomic, geopolitical, and fundamental cross-currents; those that are able to adapt effectively to these shifts will succeed throughout the year.
Berkshire Hathaway CEO Warren Buffett has regularly recommended an S&P 500 index fund.
The one time it's okay to choose a single investment
That's because your investment gives you access to the broad stock market. Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market.
The S&P 500 weighting system gives a small number of companies major influence, which could have an undue negative effect on the index if one or a few of them run into trouble. The index does not expose investors to small or emerging companies with the potential for market-beating growth.
They might not want to outperform the market
But the main one is that they might not want to, it might not be their goal: as the name implies, some *hedge* funds look for safer bets, rather than higher risk. The key is to obtain a much more stable return, so that the risk to reward ratio is actually better.
Survey Results. BarclayHedge reported that over the past five years through 2021, the average hedge fund in its universe produced net annualized gains of 7.2 percent, with a Sharpe Ratio of 0.86 and market correlation of 0.90.
Is BlackRock a hedge fund?
BlackRock manages US$38bn across a broad range of hedge fund strategies. With over 20 years of proven experience, the depth and breadth of our platform has evolved into a comprehensive toolkit of 30+ strategies.
3ο»Ώ In exchange, the Securities and Exchange Commission (SEC) requires a majority of hedge fund investors to be accredited, which means possessing a net worth of more than $1 million and a sophisticated understanding of personal finance, investing, and trading.
Investors must be able to bear certain risks not always experienced in stocks and bonds. But adding hedge funds to a portfolio can reduce risks to overall wealth. Hedge funds can help smooth portfolio returns, add diversification, and grant access to parts of the market that are often off limits to many investors.
Unlike mutual funds where you can elect to sell your shares on any given day, hedge funds typically limit opportunities to redeem, or cash in, your shares (e.g., monthly, quarterly or annually), and often impose a βlock-upβ period of one year or more, during which you cannot cash in your shares.
The S&P 500's track record is impressive, but the Vanguard Growth ETF has outperformed it. The Vanguard Growth ETF leans heavily toward tech businesses that exhibit faster revenue and earnings gains. No matter what investments you choose, it's always smart to keep a long-term mindset.
