So how about hedge funds? Can we hide there? As the following exhibit shows, all hedge fund strategies delivered on the “hedge”, losing less than the market, with some even making a tidy profit. The average Global Macro manager delivered a terrific 10% return during the past 5 months, which contrasts to a 10% loss in the worst-performing Convertible Bond Arbitrage strategy. As noted in the previous section, a 10% loss puts you in the top quartile of traditional long-only managers. Also, the range of performance within hedge fund strategies is quite large, so it matters a lot who you use. For example one very good single strategy fund of funds is shown in the exhibit. The RCG (Risk-Controlled Growth) Global Equity Long-Short (GELS) fund-of-funds lost only 1% in the past 5 months, making it one the best performing funds in the Global long-short hedge fund space.

Yes, there was a place to hide, and it was in hedge funds, especially Global Macro hedge funds.

How about the old folks?

Recent losses can be especially devastating for those in retirement, who are living off their savings. An investment loss usually cannot be made up by going back into the workforce, so the standard of living must adjust instead. Many retirees, as well as those who are saving for retirement, have invested in target date funds. These funds start out aggressively when the target date is distant and then become more conservative as the target date draws near. Those who have reached retirement are in “Current” funds, meaning the target date arrived sometime in the past. These are also sometimes called “retirement income” funds.

The following exhibit shows that investors in target date funds have indeed suffered during the past 5 months, even more than the TDA benchmark. Target Date Analytics (TDA) has created benchmarks for target date funds. Importantly in this environment, the TDA benchmark for current funds is invested entirely in inflation-sensitive safe vehicles, namely Treasury bills and Treasury Inflation-Protected Securities (TIPS). TDA believes that this is the appropriate allocation for the end of an “accumulation” fund, and that the investor should be making a second decision at retirement about appropriate distribution vehicles, such as annuities. For more information on target date benchmarks, please visit www.TDBench.com.

The exhibit shows the performance of the 3 largest target date families – Vanguard, Fidelity, and T. Rowe Price. These 3 providers currently dominate the target date fund industry, representing about 85% of this $200 Billion market.

Most of the recent underperformance of these funds, in both absolute terms, and relative to the benchmark, is explained by aggressive equity allocations. The following exhibit contrasts the “glide path” of the typical mutual fund to that of the benchmark. The glide path is the allocation pattern through time, especially the allocation to equities.

Conclusion

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