It's one of those times again. Investors can’t get a break because every time the market rallies, it soon falls apart. Those investing for the long haul might be okay, but there could be significant pain along the way and it could take years to recoup losses.

Whether they’re biased to the long side or the short side, conditions change so fast that making money is highly challenging for most traders. Most of the time, volatility is good. But not this much volatility.

It’s much easier to make money when you can trade with the trend for years, or at least weeks. Currently, it’s more like days. (For more, see: Hedge Funds: Introduction.)

The good news is that there are people out there making money. The list below consists of the three top-performing hedge fund categories for 2018 and the three worst performers as of Nov. 15, That doesn’t mean the hedge funds in these indices will perform as well (or as badly) tomorrow. 

The real key to this list is to see which hedge funds in any category have consistently delivered a positive return over the years yet still deliver in 2018's challenging environment. If a hedge fund can deliver regardless of what the market is doing, then it is in the true sense of the phrase, a “hedge fund.” It’s also a hedge fund you might want to consider investing with.

The New York Times noted earlier this year that this year's investing environment is just the kind that hedge funds are supposed to thrive in. They're supposed to excel in challenging times. Yet, in 2018 so far, the hedge funds have fallen short. "Hedge funds simply do not do what they claim from a risk or return perspective," Yogesh Dewan of Hassium Asset Management told The Times. "They really have not lived up to expectations."

Prior to looking at that list, let’s see what these hedge funds are up against.

Economic Headwinds

If you’re thinking of investing with a hedge fund, or any fund that’s long-only, then you might want to think twice. The only funds that will be capable of navigating such a treacherous market are those that are hedged, knowledgeable, experienced and disciplined. Here’s why: (For more, see: 3 Risks U.S. Equities Face in 2016.)

  • Higher interest rates with a potentially hawkish Federal Reserve
  • Central banks almost out of ammunition and less effective than in the past
  • Record global debt
  • Overbuilt and overleveraged China (world’s second-biggest economy)
  • Commodities plunge
  • Geopolitical tensions
  • Cost-cutting culture for large-caps (hurts consumer spending)
  • Population declines in Europe, U.S., China, and Japan (hurts consumer spending)
  • Student loan crisis
  • Reckless auto loans
  • Overbid real estate in large U.S. cities
  • Sky high healthcare costs (hurts consumer spending)
  • Potentially distorted asset prices caused by prolonged record low-interest rates and buybacks

Top Hedge Fund Categories November 2018

The following is from a report by BarclayHedge, which tracks and publishes indices of hedge fund performance in key industry segments. It is based on reported data from hundreds of hedge funds.

The top 3 performers year to date, as of Nov. 15, 2018:

1. Healthcare and Biotechnology Index, up 13.85% YTD

2. Distressed Securities Index, up 7.22% YTD

3. Technology Index, up 5.60% YTD

Worst Hedge Fund Categories November 2018

Here are this year's worst-performing hedge fund categories as of Nov. 15, 2018, according to BarclayHedge:

Emerging Markets Index, down 10.72% YTD

Technology Index, down 5.60% YTD

Pacific Rim Equities Index, down 5.57% YTD

The Bottom Line

Remember, anything can happen in a short period of time. It’s the hedge funds with the consistent annual returns that you want to consider first. (For more, see: Picking Top-Quality Hedge Funds.)