This year I have learnt a great lesson from investing in hedge fund in a volatile market. My financial advisor suggested a famous hedge fund from Renaissance for me last year, I was once excited and hoped it could boost my return over my passive index fund. However its return is brutal this year.
Yes, we had a very shocking pandemic early in the year and market went down 40% in March and it was devastating. Then the Fed lowered interest to 0, after several crazy meltdowns as 10% down daily, then market stopped right there and went back up, like 10% up daily. It was very unpredictable and volatility went through the roof. If the investor were to stay the course and not make changes, it would not be bad after all if you look back. If you experienced 2008, it took several years to come back, while due to the powerful financial relief and optimism of pandemic overcome, the market bounced back much quickly this time. My passive index is doing so well, but the the hedge fund from Renaissance didn’t recover as fast as it should. And in July, Aug, the market turns positive while the fund didn’t come back and in Sep, Oct, the market is edging up more, Sadly the fund even lost more. What went wrong?
I called my advisor and she got me into their monthly client meeting tele conf. The fund manager explained how they hedge by calculating beta, and the beta is off and dated in the extremely volatile market, so they under hedged when the market went down and over hedged when the market went up. The rational sounds very reasonable, but I felt they are going to have hard time again in a volatile market: the beta calculation is always dated, the faster the market change, the more difficult they can catch up with the market. I finally made up my mind to pull back the money. The redemption took months, hopefully I will get it in Dec so I can roll the money into my passive indexer and assume all the market risk and never think about hedging again.