Once Again, You're Better Off Letting A Monkey Pick Your Portfolio Than Investing In A Hedge Fund In 2016

Unfortunately for hedge fund investors, stories like this one have gotten fairly commonplace. The latest data from Wall Street hedge funds indicates fund investors would have been better off letting monkeys pick their stock portfolio.

According to the HFRX Global Hedge Fund Index, the average hedge fund has produced a 2.4 percent gain so far in 2016 once client fees are deducted. During the same stretch, the SPDR S&P 500 ETF Trust SPY is up 3 percent, and the average stock in the MSCI World index is up 7.7 percent.

If you think 2016 has simply been a bad year so far for hedge funds, it’s actually been more of the same. As of the end of February, the HFRI Fund Weighted Composite Index was down 2.6 percent over the past year, an almost identical decline to that of the S&P 500.

Prior to 2015, hedge funds had underperformed the S&P 500 for seven consecutive years.

Related Link: The Dow Jones Industrial Average Is 120 Years Old, But It Has Always Had The Same Strengths And Weaknesses

Hedge fund managers argue that the true value in the funds is risk management. However, when tested against the performance of Cambridge University’s best risk-managed simple portfolio of 80 percent stocks and 20 percent cash, MarketWatch reports that hedge funds are still coming up short. The 80/20 stock/cash portfolio, even at 0 percent interest on the cash, would still have generated a 6.2 percent gain so far this year based on the MSCI World index.

As some point down the line, hedge funds will have a good year and generate strong returns for their investors. But those investors would be wise to remember that one good year every decade may not be worth all those fees.

In the past four years, the SPY ETF is up 64.0 percent and the Global X Funds GURU, which tracks hedge fund holdings, is up only 48.9 percent.

Disclosure: the author holds no position in the stocks mentioned.