Hedge fund managers lately have worried that their industry needs to burnish its image in the wake of recent high profile troubles such as the collapse of Amaranth and insider trading allegations at Pequot Capital. Even though the Amaranth meltdown demonstrated that even a large hedge fund could fail in an orderly way and an SEC investigation cleared Pequot of any wrongdoing, some managers worry that a public impression that hedge funds are dangerous and possibly nefarious is creating public pressure for regulation.
But maybe that’s not it at all. A recent study suggests that hedge funds might really be suffering from unrealistic expectations.
Research firm Morningstar Inc. polled 600 advisers in August and found that 65 percent of them expect more than double-digit growth in alternative investments, which include hedge funds; and 67 percent of them report that more than 10 percent of their clients are already using alternative investments.
Double digit growth forever! Hurrah! And maybe Greenwich has a “lake of stew and whiskey too, And you can paddle all around 'em in a big canoe.”
Or maybe not.
This year hedge funds returned roughly 7 percent in the first nine months of the year, lagging behind the average stock mutual fund, which is up roughly 8 percent and the broader Standard & Poor's stock average, which is up about 12 percent.
The last time hedge funds delivered double-digit returns was in 2003, when they were up nearly 20 percent, according to Hedge Fund Research data. In 2004 and 2005, they returned less than half that, gaining only about 9 percent each year.