New York (HedgeCo.Net) – Hedge funds trailed the S&P 500 in 2013, the fifth year in a row. Yet, while hedge funds returned an average 7.4% last year, some investors saw double-digit returns from their hedge fund managers. According to Tony Lissuzzo, Director of Hedge Fund Research at Northern Trust, there are 8,000 hedge funds for investors to choose from.
“Strong manager selection, combined with thoughtful portfolio construction, lead to superior performance.” Lissuzzo said in an interview with HedgeCo.Net. “We spend a-lot of time and resources on initial due diligence to be sure we thoroughly understand the drivers of return and develop a thoughtful investment thesis. This makes us better investors in the long run as we reconfirm the investment thesis on a monthly basis during our monitoring process.”
“The sell decision is where most investors make mistakes. If you don’t have a thorough understanding of a manager and the strategy up front, you may redeem from a manager just based on performance. Nine times out of ten this is the wrong thing to do. You need to ensure you understand the management team, decision making process, market environment, and drivers of return for a fund. On the other hand, by just looking at performance, you run the risk of performance chasing and “confusing brains with a bull market” for the manager’s strategy.”
The gap between the best and worst hedge fund managers is double that of traditional global equity managers:
- For the three years ending March 30, 2013, the median hedge fund returned an average 4.94% per year. But, the dispersion between the 10th percentile and 90th percentile funds was 30%.
- In contrast, the 10th-to-90th percentile dispersion for all global equity funds was 13%.
Even within strategy classifications from HFRI indices, returns are far more dispersed than traditional global equity managers, “Investors might be surprised to know the stark difference in returns between managers, even with the same strategy.” Lissuzzo says.
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