If you’re a hedge fund manager, 2013 has not been kind to you. A recent analysis conducted by Goldman Sachs shows that the typical hedge fund has returned just 4 percent this year through August 9 — pretty much anemic compared to the 20 percent return on the S&P 500 (including dividends). Last year wasn’t quite as bad — an 8 percent return for hedge funds compared to a 16 percent total return for the S&P 500 — but the time-tested message is clear: hedging produces underwhelming results during long market rallies.
Hedge funds typically try to compensate for possible losses on long positions by taking counter-balancing short positions. This strategy can produce superior results during periods of market uncertainty when equity valuations are volatile. However, thanks in no small part to the easy-money policy adopted by the U.S. Federal Reserves, stock valuations have pretty much done nothing but go up since the financial crisis. This has heaped rewards on those with long positions, and punished those with aggressive short positions, including many hedge funds.
The Goldman Sachs report shows that fewer than 5 percent of hedge funds have managed to outperform the S&P 500 this year to date, and 25 of them have actually posted losses. So what are some short positions that have gotten hedge funds in trouble?