Hedge funds - A Disastrous Year for the Top Ten

Last Updated May 4, 2010 11:16 AM EDT

According to Investment News, in 2009, the total assets in hedge fund grew by only five percent, with the number of hedge funds actually declining by seven percent to about 6,300 funds. Thus, in a year in which US stocks grew by 29 percent, and international stocks grew by 38 percent, hedge funds significantly lagged. Granted, this doesn't mean hedge fund net return was only five percent, since changes in total assets include inflows and outflows of funds. Still, it's some pretty compelling evidence of a relatively poor year for the industry.

The Top Ten on Parade
Listed below are the world's largest hedge funds, followed by some key wisdom for investors.

The most important lesson that can be garnered from this list comes from the firms that don't appear. In only one year, three firms fell out of the top ten list - Goldman Sachs Asset Management, Renaissance Technologies Corp., and Citadel Investment Group, LLC.

To be sure, some hedge funds gained in assets, including the top three on the list. Others, however, had disastrous years. Declines included Goldman Sachs, loosing 45.2 percent and Farallon down 42.5 percent.

Collectively, the largest eleven hedge fund managers lost 22 percent of their assets during the year. That's right, during a raging bull market, the most successful hedge funds saw their assets shrink. I'm going to go out on a limb here, and point out that the mainly institutional investors in these hedge funds aren't pulling money out because they are thrilled with their performance.

Lessons Learned

Dan Solin, author of The Smartest Retirement Book You'll Ever Read, offers the following definition of hedge funds in his recent Huffington Post blog:

Hedge funds: A way for fund managers to make unbelievable profits by convincing wealthy investors, pensions, and trusts, they have discovered a way to achieve high returns without commensurate risk. Qualifies as one of the greatest wealth transfer vehicles in modern times.
The case for hedge funds is sexy and emotionally persuasive. But if you apply some simple common sense, you'll see the case against hedge funds stands solely on logic and economics. Unfortunately, investors tend to rely more on emotions than logic.

When someone invites you into the exclusive club of hedge fund investors, my advice is to say this is one exclusive club you can live without.


Hedge Funds - The Case for Using Them, Part 1 Hedge Funds - Case Against, Part 2 Hedge Funds of Funds - Do They Work? Part 3 on Hedge Funds

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.