The Futility of Chasing Outperforming Hedge Fund Styles

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The hedge fund industry is down 5% this year in aggregate before fees. There have been some of the biggest performance divergences between hedge fund styles in years - Managed Futures is up 17%, Global Macro is up 14%, while Equity L/S and EM funds are both down 9%.

Many investors are now looking to ramp up their allocations to Global Macro and Managed Futures style funds. That is a waste of time. Investors would be better off just holding the Index rather than chasing returns.

To give some perspective on this, we looked at the 34 cases over the last 20+ years where a single major hedge fund style (Equity L/S, Global Macro, Event Driven, Fixed Income Arb, EM, Managed Futures) outperformed the Index by at least 10% over the previous 6 months. The past performance gave little indication of future outperformance outside the first few months. In fact investors would be better off just holding the Index over the next 2 years vs. concentrating their exposures to what had done well.

A larger sample of 125 cases of when a single style outperformed the index by 5% over the previous six months paints the same picture. Continued outperformance is short-lived and investors over 2yrs would have been better off just holding the index.

At Unlimited we have focused on developing technology that replicates aggregate hedge fund index performance because holding the Index consistently provides investors with better returns while reducing the burden of seeking out and diligencing specific funds. But getting better outcomes with less work requires investors recognize the reality of the futility in trying to find outperforming managers. That's the hard part.

For informational and educational purposes only and should not be construed as investment advice. It does not constitute an offer to sell or a solicitation of an offer to buy any security. Opinions expressed are our present opinions only. No Representation is being made that any investment will or is likely to achieve profits or losses similar to those shown herein. No investment strategy or risk management technique can guarantee return or eliminate risk in any market environment. The material is based upon information which we consider reliable, but we do not represent that such information is accurate or complete, and it should not be relied upon as such. The historical analysis should not be construed as an indicator of the future performance of any investment vehicle that Unlimited manages.