(Harvest) It seems that since the recovery from the finical crisis of 2008, hedge funds have had a string of reasons for their persistent underperformance. First it was the fact that they were “defensively positioned” and did not capture the full rally of 2009. Then the US credit downgrade in 2011 hurt popular hedge fund trades. After that we had a fixed income shock, reversion of momentum / value factors and the energy shock that all seemed to conspire against active managers. But to the average hedge fund investor, these reasons are beginning to sound like excuses.
The latest struggle for hedge funds comes as another blow to the industry, but this time there’s no real crisis to point to in the markets. While many hedge funds have shrugged off the turbulence, many more are feeling the pain, especially in the most popular hedge fund trades. Some refer to these stocks as hedge fund “darlings,” because managers are drawn to them in large droves. After all, if one money manager discovers an attractive risk / reward trade-off for a certain stock, why should we not expect others to see it as well? But when the sentiment turns, managers can be quick to unload riskier stocks, leaving large losses in their wake.
