The hedge fund sector has come out fighting against claims that the industry has underperformed in recent times.

This week, New York-based bank Goldman Sachs released its latest Hedge Fund Trend Monitor, which analyzed the positions of 699 hedge funds with $1.2 trillion of gross assets at the start of third quarter of this year, and claimed that only 11% of hedge funds had outperformed the benchmark U.S. S&P 500 stock index while 20% had absolute losses year-to-date. Goldman Sachs said the average return for funds was just 4.6%.

“Hedge fund returns have historically been impressive, outperforming equities, bonds and commodities,” said Andrew Baker, chief executive of the Alternative Investment Management Association (AIMA), the London-based hedge fund lobby group.

However, a recent pick-up for hedge funds may herald an improvement in fortunes. The global hedge fund sector posted gains for the second consecutive month in July after a spring-time dip following a strong start to the year, according to recent figures from Hedge Fund Research (HFR), a Chicago-based data and analysis provider. The HFRI Fund Weighted Composite Index has now gained 2.79% year-to-date. The S&P 500 has increased just over 11% in the same period.

“Investor sentiment shifted in a fluid and dynamic manner throughout the month [of July], with financial markets discounting not only the latest European sovereign debt crisis developments, but also mixed data and outlook for U.S. and China growth, and the impact of the evolving Libor investigation,” said Kenneth J. Heinz, president of HFR.

“Hedge funds gained traction through this environment with a strong contribution from systematic macro and arbitrage executing on quantitative trend-following and fundamental mean-reverting components of their respective strategies. As this challenging macro environment continues to evolve, hedge funds are well positioned to capitalize on new opportunities which develop.”

Institutional investors, though, appear not to be put off by these less-than-stellar performances and are continuing to increase the amount of money they are allocating to hedge funds despite the seemingly poor returns on offer.

“The emergence of institutional investors as the dominant investor category in hedge funds has transformed the industry,” said a Citi Prime Finance report in June, the New York-based financial services firm’s hedge fund servicing team.

“Institutional interest in hedge fund investing is a relatively new occurrence, with the majority of flows from this audience entering the industry only since 2003. The impetus for these institutions to include hedge funds in their portfolios was two-fold. Views on how to optimally obtain beta exposure in their portfolio shifted, causing institutions to separate their alpha and beta investments, and market leaders demonstrated the value of having diversified alpha streams outside of traditional equity and bond portfolios.”


Citi Prime Finance claims that leading institutional investors could plough in “as much as $1 trillion in new hedge fund capital over the coming five years”.

Heinz at HFR added: “The hedge fund industry has evolved as an integral component of institutional allocations, allowing investors to pursue target return objectives in a transparent, risk-controlled environment, while acting as a liquidity provider and market risk participant. As financial institutions retrench from many lending and trading activities, hedge funds are likely to experience continued growth and expansion in the second half of 2012 as a result of these trends.”

Meanwhile, AIMA has also come out in defense of the hedge fund industry, criticizing a book written by Simon Lack, called The Hedge Fund Mirage, published earlier this year, which claims, among other things, that “if all the money that’s ever been invested in hedge funds had been put in Treasury Bills instead, the results would have been twice as good”.

“Many of us in the industry looked at the arguments in the book with initial interest, and then growing skepticism,” said Baker at AIMA. “Many of the most sensational claims appeared not to be backed up by any figures.”