If high-water marks were a test, the hedge fund industry would be passing with a gentleman’s C. A fresh analysis of the database reveals that at year-end 2010, 70% of all funds had surpassed their high-water marks and earned fees for the year, up from 61% in 2009 and 39% in 2008.
That’s far from the dour situation funds appeared to face in August 2010, before they were saved by rising markets. At that time, only 54% of funds were on track to earn fees for the year. This year, with 70% of reporting funds up through March, the numbers promise to improve further in 2011, barring widespread losses.
But even with the industry on its healthiest footing in three years, a substantial 16.2% of all funds in the database remain in serious trouble, having not earned fees in at least three years.
The accompanying matrix charts every permutation of fund performance in the database, based on whether a fund was at or below its high-water mark by the end of the year in 2008, 2009 and 2010 (with the bottom cohorts having launched in 2009 and 2010).
Of the funds in the worst situation, the 16.2% that haven’t earned fees in three years, only a scant 10% had produced the gains necessary to exceed their high-water marks in the first quarter of 2011. The remaining 90%, the sickest funds in the database, will have to produce a median return of 10.6% (the average return required is 23.61%) to attain their high-water marks.
Of funds that launched in 2008 or earlier, 20.6% earned performance fees in all years, up from 14.4% that were in a similarly enviable position in August 2010, the last time this analysis was conducted. Most of these funds, the healthiest in the database, are on their way to continued profitability. About 72% were profitable through the first quarter of 2011. Those that lost money require a median return of 1.9% (2.7% on average) to regain their high-water marks.
By strategy, credit funds were the healthiest (see chart below):
Strategy | % Above HWM at yearend 2010 |
Credit | 91% |
Convertible & Equity Arbitrage | 90% |
Latin American Equity | 87% |
Event Driven | 87% |
Multi Strategy | 87% |
Technology | 83% |
Distressed | 80% |
Mixed Arbitrage | 79% |
Mortgage Backed Securities | 76% |
Latin American Debt | 75% |
Fixed Income | 73% |
Global Equities | 66% |
Macro | 66% |
Commodities | 62% |
US Equity | 62% |
Managed Futures | 57% |
