Salient to Investors:

Hedge funds returned 7.1 percent in 2013 through November versus the 29.1 percent return of the S&P 500 Index, with reinvested dividends, and are headed for their worst annual performance relative to US stocks since at least 2005 and underperforming for the fifth year in a row. Hedge funds have underperformed the S&P 500 by 97 percent since the end of 2008.

Hedge funds charge fees of 2 percent of assets and 20 percent of profits versus average 1.3 percent expense ratios for actively managed US stock mutual funds, according to Morningstar, and whose managers averaged gains of 31 percent this year through November.

Hedge Fund Research said hedge funds had their worst showing relative to the S&P in 1998, when the HFRI Fund Weighted Composite Index trailed by 26 percent. HFR said hedge funds attracted $53.2 billion in the first 9 months of the year, versus $34.4 billion for all of 2012.

Hedge funds last beat US stocks in 2008, when they lost a record 19 percent and the S&P 500 declined 37 percent. They outperformed by the most when they returned 31 percent in 1993 versus a 10 percent increase for the S&P.

Nick Markola at Fieldpoint Private said it has been difficult for hedge funds on the short side as funds were defensively positioned.

Stan Druckenmiller said hedge fund results were a tragedy and questioned why investors pay hedge-fund fees for annual gains closer to 8 percent. Druckenmiller said he and other veteran managers including Michael Steinhardt, Julian Robertson, Paul Tudor Jones and George Soros were expected to make 20 percent a year in any market, more if the market fell more than 20 percent – you won’t make money talking about risk-adjusted return and diversification, you have to identify the big opportunities and go for them.

Eric Siegel at Citigroup said comparisons with stocks are unfair because hedge funds have different goals and not all hedge-fund clients are looking for super-high returns but high-quality returns that have lower levels of risk over a 3 to 5-yr investment cycle. Plus they can trade in all markets from corporate bonds to the yen to corn.

Francis Frecentese at Lyxor Asset Mgmt cites a gradual erosion of out-performance as competition in hedge funds heated up along with a changing investor base, which does not want volatile returns.

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