Over the next week or so we are going to hear quite a big about how much the S&P 500 was up in 2019 (29% at the time I'm writing this).
Few market participants anticipated such strength so they will be happy to see their account balances grow. However, for many fund managers these big gains are a source of gloom and despair.
The Bloomberg Equity Hedge Fund Index has only managed a gain of 10% through the end of November, which has to be some of the worst relative performance ever. It is not unusual for hedge funds to underperform in straight-up markets since "hedging" carries some cost, but the degree of underperformance is striking.
Hedge fund managers are supposed to be the best in the business to justify their fees yet they simply couldn't even manage half the returns of a passive approach.
It isn't that the active managers are that bad, it is that the nature of the market recently is to reward a passive buy-and-hold approach. This will eventually shift and as the market undergoes a correction the active managers will outperform again.
The advantage of active management is better control of risk in a difficult market. There is opportunity cost to being cautious and in 2019 the opportunity cost was tremendous.
This past year was a good illustration of the old saying that "everyone is a genius in a bull market." Staying long in an index was the only thing that you needed to do and that doesn't take much strategy.
It is likely that active managers will have much better relative performance in 2020 if there are some meaningful pullbacks.
Staying long is a no-brainer when there is trending action as strong as we've seen lately. Navigating ups and downs is where the value of active management becomes apparent.
