Small cap stocks have rebounded so strongly that they have all but made up for the relative underperformance vs. hedge funds in 2008. Most hedge funds failed to safeguard their 2008 outperformance margin while equities resurged. Fund of funds continued to underperform, trailing S&P 500 by 4+ pps. One can’t help but wonder if poor due-diligence can turn out to be so costly that capital moves to fund of funds to further allocate to active managers – If you just take the number of hedge funds caught in fraud last year and imagine a hyperbolic seasoning curve to identify cumulative frauds, I’ll be surprised if materially more than 3% of all existing hedge fund managers will be caught in fraud over the next 5 years (Is that large enough to warrant investment in a vehicle that underperforms in almost anything other than a bearish market. Since 2002, the only point when fund of funds cumulative returns caught up with the broader market was at the end of 2008). Further, despite the “due-diligence”, it is well documented that FoFs were the biggest losers in the largest reported fraud. I am sure there are some FoF managers that add value but it is likely a small minority.
Exhibit - Cumulative performance through 03/31/10
Note: CST AllHedge performance for 03/10 is not available yet.
Disclaimer: Performance figures are for informational purposes only and do not constitute investment advice or an offer or solicitation to buy or sell any designated investments discussed herein.
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