The S&P 500 index returned 28.9% in 2019, nearly four times the return on a global hedge fund index. Yet some investors can’t seem to kick the hedge-fund habit. Go figure.
For example, according to a report Tuesday morning from Bloomberg, hedge fund manager D.E. Shaw returned 11.2% to investors in its Composite fund, the largest fund in the firm’s $50 billion total assets under management. The firm’s Oculus fund returned 11.8% in 2019, according to Bloomberg.
Investors in Shaw’s Composite fund can expect to pay 3% of their assets and 30% of the profit on those assets beginning this year. That’s higher than the famous hedge-fund “2 and 20” formula, where investors pay 2% of assets and 20% of profits in annual fees.
Shaw, contrary to hedge fund industry trends, is raising its fees. As of last May, many other hedge funds are dropping the “2 and 20” fee structure due to tepid performance. Average costs among all hedge funds, according to Credit Suisse, were just 1.45% of asset value and 16.9% of profits. Only 3% of funds still charged a 2% management fee while just 16% charged a 20% slice of profits.
At the time, we looked at five ETFs that followed different hedge fund strategies but cost far less in fees (and nothing in profits). None of the funds had more than $1 billion in assets under management (AUM) and only one had an expense ratio above 1%. The five ETFs were the IQ Merger Arbitrage ETF (NYSEARCA: MNA), the IQ Hedge Multi-Strategy Tracker ETF (NYSEARCA: QAI), the First Trust Dorsey Wright Dynamic Focus 5 ETF (NASDAQ: FVC), the WisdomTree Managed Futures Strategy Fund (NYSEARCA: WTMF) and the AdvisorShares Ranger Equity Bear ETF (NYSEARCA: HDGE).
In the five-year period between 2015 and 2019, the S&P 500 returned a hair more than 42%, including nearly 29% in 2019. Hedge Fund Research’s HFRX Global Hedge Fund Index posted an 8.62% return in 2019 and has a five-year return of 6.07%
In the following chart, we’ve shown each fund’s AUM and net asset value (NAV) in December, the expense ratio, the 2019 return on investment and the five-year return. The Dorsey Wright Dynamic Focus 5 fund has not yet reported its full-year return for 2019 and has been in existence only since March of 2016. Its one-year return comes from ETFdb.com, which calculates the result relative to a peer-group category. The AdvisorShares Ranger Equity Bear fund one-year performance data covers only the first nine months of 2019, and the five-year return data comes from ETFdb.
| AUM | NAV | Expense Ratio | 2019 Return | 5-Year Return | |
|---|---|---|---|---|---|
| MNA | $931.2 million | $33.14 | 0.77% | 5.03% | 3.73% |
| QAI | $853.2 million | $30.82 | 0.80% | 9.36% | 2.76% |
| FVC | $430.9 million | $27.63 | 0.89% | 17.85% | 9.07% (3 years) |
| WTMF | $151 million | $37.13 | 0.65% | −3.19% | −1.98% |
| HDGE | $106.9 million | $23.81 | 3.12% | −21.97% | −54.72% |
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