Santa Again Helped Hedge Funds, But Not Enough

As usual, hedge fund managers enjoyed a good December. The Hennessee Hedge Fund Index jumped 1.28%, pushing the index up 11.36% for the year.

The US Greenwich Global Hedge Fund Index managed an even better December surge, up 1.53%. Over the whole year, the Greenwich Global Index rose 12.23%.

But the average hedge fund manager is like the NY football Giants, who sometimes make the game close but seldom win. The fund managers lost out to the S&P 500, up 13.6%, and the DJIA, up 16.3%.

If we count dividends, hedgers fell even shorter last year. The S&P returned a total of 15.79%, according to The Wall Street Journal, and the DJIA returned 19.05%.

Why do even otherwise lackluster hedge funds tend to perform well, at least on paper, in December? According to this study by Vikas Agarwal of Georgia State and Naveen Daniel of Purdue, hedgers revalue the past and borrow from the future in hopes of qualifying for bonus money:

Our results suggest that this spike arises due to funds potentially managing their returns upwards in December. This spike seems to be achieved by (i) adding back in December the under-reported returns during earlier months of the year, and (ii) by borrowing from future returns. We find that the spike is more pronounced among funds whose incentive fee contracts are near-the-money and whose performance lags their peers, indicating that incentives may be driving the return management behavior.