9
Morningstar FundInvestor
August 2
013
complex investment. Poor, uninformed buyers did little
research at best and landed in a low-cost, transpar-
ent, simpler (if not simple) investment. The
2008
finan-
cial markets delivered the massive bear market that
the high-cost instrument was designed to resist and
the low-cost instrument was not, dealing the low-cost
investment such losses that the U.S. Senate held
hearings on the subject in
2009
. Yet the easy winner
since the middle of last decade has been the low-
cost instrument. Funny how that works.
Not only did target-date funds outgain
HFOF
s over
that stretch on paper, but they also were better used
by their owners. Cash flows into target-date funds
have been steadily positive, year after year. As a re-
sult, Morningstar Investor Returns (see link in the
PDF
edition of this issue for an explanation of that cal-
culation) for target-date funds are higher than the
funds’ actual returns—that is, there was more money
invested in target-date funds when they were rising
(post-
2008
) than when they were sinking (
2008
). Not
so much with
HFOF
s. They received inflows in the
mid-
2000
s following good returns, had poor absolute
and relative returns when they were at peak assets,
and are now leaking cash.
It’s not just
HFOF
s. Take a look at the recent net
flows into systematic-futures hedge funds (some-
times called managed futures), accompanied by
the category’s average rate of return that year and
the performance of the S&P
500
.
An almost perfect record of inept tail-chasing. Money
flowed into systematic-futures funds in
2006
. The
funds trailed stocks that year. The following year, as
money was leaving, the funds beat stocks. The next
year, presumably because of
2007
’s good perform
ance, cash flows reversed and money came back into
the category—which had a career year, gaining
18%
even as everything else went down. (The year
2008
was the lone exception to ineptitude.) Follow-
ing this bang-up showing, cash flows were positive
three years running, even as futures funds badly
trailed stocks. Finally, after suffering through that
long period, investors started to give up on the
category, yanking money out last year and again so
far this year.
These are not isolated incidents. Hedge funds in
theory are held for diversification, but in practice they
tend to be purchased and evaluated on performance.
Because they behave quite differently from other
assets, they frequently lag the rest of a portfolio’s
holdings—thereby inducing the frustrated institu-
tional or high-net-worth investor to swap that hedge
fund for another flavor. Hedge funds, in addition
to being expensive, are deucedly difficult to own.
It doesn’t make much sense to me that becoming
wealthier and more informed leads to worse
investment results ... but with hedge funds, that
does seem to be the case.
œ
Contact John Rekenthaler at
Year
Inflow ($Bil)
Systemic Futures
Hedge Funds %
S&P 500 %
2006
7.20
8.66
15.79
2007
-1.10
14.16
5.49
2008
2.40
18.10
-37.00
2009
0.80
1.65
26.46
2010
2.10
11.55
15.06
2011
11.90
-6.28
2.11
2012
-3.70
-1.07
16.00
2013 (YTD May 31)
-2.10
0.58
15.37
Source: Morningstar data.
