2012 is a “make or break” year for hedge funds, says Allstate

This year is a crucial year for hedge funds, Christopher Vogt, global head of hedge funds at investment manager Allstate Investments, told Reuters on April 18.

The tough times that these funds are facing is made evident by the difficulty that market participants are having when starting new hedge funds, according to Reuters. Many of these would-be entrepreneurs are having a tough time getting the capital they need to start funds in this space. Survey data provided by Deutsche Bank showed that while 53 percent of investors were willing to provide the seed capital needed by these firms in 2002, only 17 percent indicated this willingness in 2011.

Institutional investors who have invested tens of billions into the asset managers might consider other options if the hedge funds do not perform well in 2012, Reuters reports.

Data provided by Hedge Fund Research's HFRI index indicates that funds in this space recorded losses averaging 5.2 percent in 2011, compared to the 2.09 percent gain experienced by the S&P 500 Index, the news source reports. Equity hedge funds fared even worse than other types of funds in this space, plummeting 8.4 percent during the period. The bets of these asset managers were hurt by rising correlations among the stocks they trade.

"If they have another low-to-zero return year then you will have had a three-year cycle of very low absolute returns," Vogt told the media outlet.

The market expert stated that hedge funds are experiencing rising correlations with other asset classes, and that their ability to obtain returns over and above the market – also known as alpha – is falling due to the skill of asset managers, the news source reports.

On the plus side, hedge funds have managed to generate returns of 4.9 percent during the first three months of the year as markets benefited from various headwinds including continued easy money policy from both the U.S. Federal Reserve and the European Central Bank, according to the media outlet. These yields are far below the 12.6 percent return that the S&P 500 Index has generated during the period.

"So far, returns out of the gate this year are pretty good. You'll need a full year of flat-to-down returns before pension funds start to rethink their allocations to hedge funds," Vogt told the news source.