Hedge funds entered this year coming off their 10th straight year of trailing the return of the S&P 500 Index. And as you can see in the following table, over the 10-year period ending 2018, they underperformed every single major equity asset class by wide margins. They also outperformed virtually riskless one-year Treasuries by less than 1%, and underperformed intermediate and long-term Treasuries.

With that perspective, we’ll review their performance over the first three months of 2019, in which the HFRX Global Hedge Fund Index returned 2.13%, 0.63%, and -0.17%, respectively, producing a total return of 2.6%.

As you can see, the hedge fund index underperformed every major equity asset class, and two of the three bond indexes. However, we can take our analysis a step further and determine how hedge funds performed against a globally diversified portfolio.

Other Scenarios

An all-equity portfolio allocated 50% internationally and 50% domestically, equally weighted among the indexes from the table within those broader categories, would have returned 11.7%, outperforming the hedge fund index by 9.1 percentage points.

Another comparison we can make is to a typical balanced portfolio of 60% equities and 40% bonds. Using the same weighting methodology as above for the equity allocation, the portfolio would have returned 7.3% using one-year Treasuries (outperforming the hedge fund index by 4.7 percentage points), 8.3% using five-year Treasuries (outperforming the hedge fund index by 5.7 percentage points), and 11.0% using long-term Treasuries (outperforming the hedge fund index by 8.4 percentage points).

Given the results and the wide dispersion of returns between U.S. and international equities, one might think hedge funds would have used their freedom to move across asset classes, which they often tout as their big advantage, to better effect.

The problem is that the efficiency of the market, as well as the cost of the effort, can turn that supposed advantage into a handicap. Given the evidence on hedge funds’ underwhelming results, it’s a puzzle why they are still managing about $3 trillion in assets.

I’ll report back again on hedge fund performance after the second quarter.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 130 independent registered investment advisors throughout the country.

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