Hedge Funds Lost A Lot Of Money – But (Sort Of) Did Their Job

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What's going on?

$95 billion. That’s how much money hedge funds lost summer. That’s not just a big loss-- it’s their biggest loss since the financial crisis. On the bright side of things, their performance wasn’t as bad as the stock market.

What does this mean?

There is an index that tracks the performance of hedge funds (sort of like the S&P500 tracks the performance of stocks) – and that was down 3.9% in the third quarter.  It was down 1.5% for the first nine months of the year which, if maintained, would be the worst performance for hedge funds since 2011. The good news is that it did outperform stock markets, as US stocks were down more than 6%. That’s important, because hedge funds have, on average, underperformed the post-financial crisis rally in stocks.

Why should I care?

  1. The bigger picture: Hedge funds target lower returns and are, arguably, less risky than before the financial crisis. On the whole, they aim to create solid, ‘risk-adjusted’ returns rather than aiming to shoot the lights out. That means they are ok with not matching the performance of stocks on the way up, as long as they do a better job for investors on the way down. That is, essentially, what hedge funds have been selling to their investors - and that appears to be what they’re delivering.  
  2. Personally: It’s pretty difficult to invest in hedge funds, unless you’re really rich. Most hedge funds aren’t available to the average investor, although some offer “closed-end” funds that trade like stocks on exchanges.
Originally posted as part of the Finimize daily email.

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