The hedge fund industry could use a stimulus plan. As of August, while 62% of all funds had produced gains for the year, 54% of the funds in the AR database were below their high-water marks.
That is a substantial decline from the 59% of funds that exceeded their high-water marks in 2009. More ominously, 22% of all funds that report to AR are in danger of earning zero performance fees for the third year in a row.
The news is not all bad, with 57% of all funds having been at or above their previous high-water marks coming into 2010 (meaning they earned performance fees in either 2008, 2009 or both years). Of these healthier funds, 36% have fallen in 2010, representing a total of 21% of the database. These funds need to produce a median return of 3% (the required average return is 5%) to return to their high-water marks and earn performance fees for 2010.
The matrix below charts every permutation of fund performance in the database, based on whether a fund was at or below its high-water mark by year-end in 2008 and 2009 and through August 2010 (with the bottom cohorts having launched in 2009 and 2010). Of funds that launched in or before 2008, 14.4% earned performance fees in both years and are on track to earn fees this year. Another 10.2% earned fees both years but have fallen in 2010. Another 5.6% that launched in 2009 were up last year and this year. These are the healthiest funds.
The sickest funds are the 22.1% of the database that earned no performance fees in 2008 and 2009 and are still below their high-water marks as of August. These unfortunate funds will have to produce a median return of 19% (the average return required is 33%) to attain their high-water marks again.
Funds that were above their high-water marks as of August, including those launched this year, constitute nearly 46% of the database.
By strategy, arbitrage and distressed funds were healthier than equity and futures funds (see the full breakdown by strategy below).
| Strategy | % Above High Watermark as of August 31 |
| Convertible & Equity Arbitrage | 94% |
| Distressed | 89% |
| Mixed Arbitrage | 82% |
| Credit | 74% |
| Latin American Equity | 68% |
| Fixed Income | 68% |
| Mortgage Backed Securities | 58% |
| Technology | 57% |
| Event Driven | 56% |
| Multistrategy | 53% |
| AR Composite | 46% |
| Commodities | 44% |
| Macro | 42% |
| Global Equity | 40% |
| Latin American Debt | 40% |
| Managed Futures | 35% |
| U.S. Equity | 28% |
