Diligent readers of Bloomberg Businessweek will have noticed a pattern. From our June 2012 cover labeling hedge fund manager John Paulson “The Big Loser” to our July 2013 cover on “The Hedge Fund Myth” to posts this week about hedge funds badly underperforming the broader market—we’ve been rather exhaustive in cataloging the asset class’s problems.
Time to give credit where it’s due, however. Paulson, who pocketed $4 billion in 2007 on prescient subprime mortgage investments and then suffered horrible reversals in 2011, is having a pretty good 2013. His Advantage fund has gained 30 percent through November, Bloomberg News reports today, and a fund betting on a U.S. economic recovery has gained 55 percent. The hedge fund industry overall has gained 7.1 percent in 2013, according to Bloomberg data.
Successes like Paulson’s serve to bolster the hedge fund mystique: that brilliant individuals can see where the market is going and deserve gigantic fees, often 2 percent of assets and 20 percent of gains, to take investors there. The biggest names in the field such as Carl Icahn, Bill Ackman, and David Einhorn use outsized auras and headline-generating abilities to try to move stocks up and down.
Those maneuvers help distract from the reality that, on the whole, hedge fund returns aren’t pretty. The Standard & Poor’s 500-stock index was up 29.1 percent through the end of November—and remember, regular retail investors aren’t paying those two-and-twenty fees.
An additional Paulson fund has been a disaster this year. Focused on gold, which believers hope will profit in times of government turmoil and inflation, this fund has lost 63 percent from January to October, Bloomberg reports.