Hedge fund horror: hedge funds feeling the pain - “This is not at all what we expected”

The first quarter has not at all been as good as expected for many hedge funds, given how strong the overall market has been which can spell disaster for some given that the very short term indicator of YTD performance (rather than performance since inception) represents such an important driver of investor and manager behavior. You cannot under perform the market and your peers for too many months. However, at the end of the day, what does it matter if some hedge funds have to close down? The bigger question is of course however what the overall market implications are. Could there potentially for instance be a repeat of what we saw in Q418? 

Surprisingly, many big names are flat to small down for the year and some are down high single digits and even low- teens. In regards to active management 2021 is another disaster year. The degree of difficulty involved in managing professional money has increased significantly from last year (see Risky risk taking). The Alpha generation is at multi-year lows. 

Ultimately, the volatility and negative alpha under the surface have been masked & mitigated by the market staying string (eg S&P500 at new ATH) - given the significant net long bias across the hedge fund community.