A year ago, when we reported that “Hedge Funds Underperform The S&P For The 5th Year In A Row”, we thought there is no way this underperformance can continue: after all who in their right mind could possibly anticipate that a “risk-free” centrally-planned world could last for 6 years (well, maybe the USSR).
Back then we explained this now chronic, “new abnormal”, regime as follows: “hedge funds are “hedge” funds and appear to have done a great job managing performance over time… but in the new normal world in which we live, where downside risk is irrelevant (until it runs you over), all that matters is return (not risk-reward).”
And yes, as the chart below shows we were wrong: because as of this moment the average hedge fund isnot only underperforming the market for a record, 6th year in a row…
But as Goldman pointed out last night, the return of the entire hedge fund universe as of November 19 is…negative 1%.
Why? Because virtually the entire hedge fund community was positioned incorrectly going into, and then continuing in 2014, thanks to a massive bond short, which every time it appears to start working, an exogenous shock forces round after round of short covering sprees.
That and, of course, the fact that the Fed has inverted the cost of capital, and the worst of the worst companies can issue junk debt at 5%.
Ironically, it was Goldman which was at the forefront of the sellside crew pushing hedge funds to short the 10Year because any minute now the economy would soar. Instead we now have the BOJ, The ECB, the Fed and as of last night, the PBOC, all engaging in collective easing.
Here is Goldman’s mea culpa-cum-explanation: