Hedge Funds Grow By $225 Billion In Bad Year

1/2/14 10:30AM EST

Hedge Funds Grow By 225 Billion In Bad Year Hedge Funds Grow By $225 Billion In Bad Year

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2013 was another poor year for hedge fund returns. The numbers are not nearly as bad as those from 2011 or 2012, but they do demonstrate an inability to beat indices and raise questions about the usefulness of the financial vehicles in their most active year since before the financial crisis. According to a Eurekahedge report on the performance of the vehicles, in 2013, total assets grew to $2.01 trillion this year, a record high.

Investors continue to pump money into hedge funds, but the vehicles continue to lag major indices. According to the Eurekahedge report long/short equities hedge funds were up 14.3 percent in 2013. The S&P 500 gained more than 31 percent in the same period. The hedge fund industry has had this problems for a while, and they charge fees for the effort. It’s not clear what investors are paying those fees for.

Hedge Fund Underperformance

According to the Eurekahedege report the best hedge fund strategy in 2013 was distressed debt, which gained 16.8 percent for the full year. Equities was the second strongest performing category, while event driven funds came in third with returns of 11.3 percent. Any ordinary investors could have  beaten the average hedge fund by investing their money in an index ETF in any number of assets. An investment in a ETF covering the S&P 500 would have returned much more than an investment in a hedge fund of funds.

Yearly returns from the entire Eurekahedge hedge fund index sat at 8.02 percent at the end of 2013. That return is not a bad one, it certainly beats the performance of the vehicles in 2011, when they lost 4.8 percent, and 2012 when they gained just 3 percent. Hedge funds have been poor performers for multiple years in a row, and they have not shown an ability to perform well in bad times, as the industry promises.

Despite that, investors are still stowing money in hedge funds, and paying fees for the privileged. The vehicles are still some of the most widely followed on Wall Street, and their media presence certainly has an effect on the amount of money flowing into the vehicles.

Hedge Fund Assets Explode

North American hedge funds swelled their assets by $73.6 billion through 2013, while the entire industry packed in an extra $228.8 billion, the fastest annual growth since 2007. Despite the lack of an impetus to invest based on returns, hedge funds are swelling at an incredible rate.

Hedge funds are not about to stop growing, as far as the Eurekahedge report indicates at least. Though they have returned less than the wider market for several years in a row, and charge fees on top, investors cannot get enough of the industry. For individuals, however, returns clearly show that an investment in a hedge fund is not worth it, and should be avoided without specific knowledge, and appreciation, of a fund’s strategy.