Nicholas Vardy

Even as the S&P 500 flirts with the 2,000 level, up a solid 7.71% through the first eight months of 2014, the hedge fund industry is enduring yet another difficult year.

Once renowned for risk-loving “cowboy” trading and double-digit percentage returns, hedge funds have failed to live up to their reputation as money-making machines.

Hedge Funds: Trailing the Market in 2014, Yet Again

According to data compiler Preqin, hedge funds have trailed Standard & Poor’s 500 stock index in 2014, both through the end of July, as well as over the past 12 months. Year-to-date through July, the Preqin Hedge Fund All Strategies benchmark posted a gain of 3.47%. That’s far below the 4.45% gain for the S&P 500 over the same period.

Other observers of the hedge fund world confirm this underperformance. The Barclay Hedge Fund Index is up 3.26% through end of July, while Hedge Fund Research pegs the average hedge fund return at just 2.5% over the first seven months of the year.

Preqin also notes that hedge funds underperformed the broad U.S. stock market over the past 12 months. Having rallied 14.5% over the past year, the S&P 500 outpaced the Preqin Hedge Fund All Strategies benchmark by more than 5%. Perhaps most surprisingly, not a single one of the 19 major hedge fund strategies tracked by Preqin have beaten the S&P 500.

Nor is the picture any better across the pond. The $492 billion Europe-focused hedge fund industry generated a return of 2.1% in the first half of 2014. That is less than one-third of the 6.7% return of the benchmark STOXX Europe 600 Index. As Barbara Wall, Europe research director at Cerulli Associates points out, hedge funds last outperformed European stocks in 2008, when hedge funds fell 17.4% and the STOXX Europe 600 slumped 43%.

Hedge Fund Investors: Increasingly Disaffected

Looking at this underperformance, no wonder some institutional investors have cut back or even completely axed their investment in hedge funds.

The disaffected group includes $300 billion mega pension fund California Public Employees’ Retirement System (CALPERS); the $18.3 billion Los Angeles Fire & Police Pension System; and even the $2.7 billion Oxfordshire County Council, Oxford, England; all of which have reduced their hedge fund investments.

The Market Claims Its Scalps

Up until 2008, hedge funds had a fantastic run. Since then, making money in the markets has become markedly more difficult. The big hedge fund managers achieved most of their big returns before 2008. Since the market bottomed in March 2009, almost all the big names have lost their way.

Nicholas Vardy

Nicholas Vardy is currently editor of the monthly investment newsletter, The Alpha Investor Letter, which provides longer-term global investments. He also writes two weekly trading services, Triple Digit Trader and Bull Market Alert, which focus on making short-term profits in the hottest markets in the world.