Hedge Funds Hedge

Michael Burry: Lawrence, I found something really interesting.
Lawrence Fields: Great, Michael. Whenever you find something interesting, we all tend to make money. What stock are you valuing?
Michael Burry: No stocks. I want to short the housing market.
--The Big Short

Hedge funds have been under performing major stock indexes. Should this be a surprise? As we have noted before, no.

Hedge funds were built to 'hedge,' meaning that they manage risk by taking positions in assets that are not well correlated. This is why hedge funds themselves are considered alternative assets in the fund management world.

Hedge funds’ decade-long underperformance of S&P 500 pic.twitter.com/DWPxDm1tln

— Liz Ann Sonders (@LizAnnSonders) October 22, 2019

Note from the graph that hedge funds outperform when stocks go down. This is what you want from a good hedge.

If hedge funds did not under perform in strong stock bull markets, they would not be doing their job.