Hedge Funds Feeling the Pain from Crowded Trades

November 12, 2015

Hedge Funds Feeling the Pain from Crowded Trades Photo

After another recent period of disappointing performance, hedge fund investors may be well served to heed a popular Yogi-ism: “Nobody goes there anymore, it’s too crowded.” This week’s chart displays a history of drawdowns (peak-to-trough declines) for the hedge fund universe since 2011. Crowded trades among hedge fund managers in increasingly illiquid markets have contributed to the recent losses.

The third quarter this year was especially challenging for equity long/short hedge funds as crowded equity positions fell sharply. Some of the most crowded stock holdings among hedge funds were Valeant (down 22%), Sun Edison (down 76%) and Micron Technology (down 20%).

Crowded behavior among hedge funds has not been limited to stock selection this year. An unexpected second quarter rally in the Euro versus the U.S. dollar caught many hedge funds “off-sides” in the currency markets. Last month, many hedge funds were caught on the wrong side of the rapid recovery in emerging market stocks and bonds. 2015 is shaping up as another year where hedge funds have failed to deliver performance that justifies the high fees investors are charged.

Key Takeaway: Despite some prominent hedge funds closing their doors this year (such as Bain Capital Absolute Return and Fortress Investment Macro Fund), industry assets under management continue to grow and recently set a record of over $3 trillion. However, the question now is if many hedge funds continue to simply follow the herd and deliver disappointing results, how much more patience will investors have to stick with the struggling asset class?

Tags: Chart of the Week | Hedge funds | Bain Capital

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