December, and thus year-end, hedge fund returns are rolling in and the results are upbeat across the board. According to the Hennessee Group, hedge funds in 2009 had their best performance year in a decade. The Hennessee Hedge Fund Index was up 24.6% last year, essentially erasing last year’s dismal 19.83% loss. It was the best year for hedge funds since 1999, when funds tracked by the Hennessee index earned 30.77%.
Only short-biased managers lost money in 2009, which isn’t surprising given the fact that the Standard & Poor’s 500 stock index earned 24.7%. We’ll leave aside, for now, the obviousâ€”and for fans of alpha, worrisomeâ€”similarity between the Hennessee index’s return and the S&P 500.
The top-returning strategies for the year in the Hennessee index were convertible arbitrage (up 39.9%), emerging markets (up 39.1%) and distressed (up 43.3%). “Of these we are particularly bullish in distressed in 2010 due to enormous opportunities still remaining and yet to some,” said Hennessee Managing Principal Charles Gradante in a statement.
So it’s all good, right? Wellâ€¦.
Back to Earth
Leave it to the Breakingviews folks to burst the bubble. In a piece published Wednesday, Christopher Swann channels his inner Burton Malkiel â€¦ no, strike that, he cites Burton Malkiel â€¦ in a rant against using hedge fund indexes as a performance benchmark. These arguments aren’t newâ€”that managers report to hedge fund indexes voluntarily, thus skewing the performance numbers higher. HedgeWorld wrote about Malkiel’s argument in 2004.
It’s probably good to bring them up now and then, to remind folks of the limitations of hedge fund indexes. For years I have maintained not only that you can’t take the index return figures as gospel, but you can’t trust only one index. Unlike equity indexes, hedge fund indexes are, at best, a partial snapshotâ€”maybe not even that clear, maybe more like part of a realist paintingâ€”of hedge fund performance. Reading them correctly requires studying multiple indexes and it takes a degree of interpretation.
Swann doesn’t break any new ground in his piece, but it’s a timely reminder, now that we’re all feeling giddy about 2009 performance.
CNBC’s version of ‘Crossfire’
TV does some things well, and others very poorly. Debating the merits of a carried interest tax on hedge fund managers in three minutes is one of the things TVâ€”specifically, in this case, CNBCâ€”does poorly.
Much better, and more informative, was this Wall Street Journal article.
For what it’s worth, I think performance fees should count as regular income, and be taxed as such. I expect others disagree. The forum is open.
News headline: Canada Police search for ‘Chinese Warren Buffett’