2017 did not seem to be the year of the hedge fund. An industry that many investors saw as stale and overpriced largely failed to reinvent itself, and hefty fees combined with lackluster returns drove money to other areas. In that sense, 2017 was somewhat like 2016 had been for funds overall.
Still, hedge funds managed to turn in the best overall performance in four years for 2017, although it was not enough to draw attention from other flashy trends like cryptocurrencies. Perhaps part of the reason for this is that hedge funds gained less than half of what the S&P 500 Index did for the same period.
Hedge Funds Returned 8.5% Vs 21.8% for S&P 500
According to data from Hedge Fund Research reported on by Bloomberg, hedge funds in total gained 8.5% for 2017. This was an impressive performance over the previous years. On an asset-weighted basis, this meant gains of 6.5%, which was the strongest performance since 2013. Along with these relatively strong figures came boosts to profits for general partners and managers that topped any levels since 2013 as well.
On the other hand, hedge funds as a category still lagged behind other indexes, oftentimes dramatically. The S&P 500 index, for example, returned a total of 21.8%, shattering the average hedge fund return. Worse, many markets overseas actually brought in even better returns; iShares MSCI Emerging Markets, for example, returned 37.1% for the same period.
Tracking Funds Is Tricky
One issue that continues to plague the hedge fund industry is that it is tough to track the performance of any particular fund relative to industrywide benchmarks. This is because there are a huge number of different types of funds, and new funds keep appearing all the time. In 2017, a number of new blockchain and cryptocurrency hedge funds entered the field, for example.
Considering that there are so many types of hedge funds out there, each with a different set of risks, objectives, returns and benchmarks, it can be very difficult for investors to keep tabs on performance. Put this together with a recent history of underperformance and notoriously high fees across the industry, and it's more difficult still for any particular fund to meet its benchmarks.
And yet, in spite of the lackluster record for 2017, hedge funds are going strong. They maintain total assets under management (AUM) of more than $3.3 trillion. By comparison, the entire cryptocurrency space has yet to come close to a $1 trillion overall market cap as of this writing. Nonetheless, perhaps everyday investors would be better off looking to low-cost funds and other investment vehicles as a means of growing their assets.