Here is a recent article on annualized returns of some of the biggest hedge funds in the world today. going through the list in detail, it dawned on me that for fundamental investors, the ones with annualized returns north of 18% per annum AND being around for at least 10 years are funds that have predominant flavor in distressed investing (mostly debt).
In fact, other than Berkshire, I am not aware of any equity hedge funds that has been around for longer than 15 years and annualized greater than 20%. Yet there are such funds for macro, multi-strats and distressed debt shops.
... Just food for thought. Most people, especially the young and inspired ones, are always focused on equities, it profound to realized that the highest potential returns asset class/strategy isn't even equity long short, instead its distressed, even macro, although the latter has performed poorly over the past few years.
There's a lot of value funds out there with a 15 year track record and annualized returns >20%.
I think Icahn did something like ~35% annualized returns for one 40 year period. The difference between him and Buffett, is that Buffett did it with a lot more capital under management and was way more tax efficient.
that's not true. Name any public equity-only value fund that has annualized 20% over 15 years. (with at least $500 million in AUM)
Icahn's annual return over the past 15 years is 21%, Proof: http://www.octafinance.com/hedge-funds/hedge-fund-returns/
he is also an activist who, unbeknownst to most, made alot of money in distressed debt. Proof: https://www8.gsb.columbia.edu/valueinvesting/sites/valueinvesting/files…
No real surprise here. Many of the top 'value' investors (Klarman, Abrams, Marks/Karsh, Icahn/Tepper if you consider them value guys, etc.) have always had a heavy distressed tilt, even if one wouldn't consider them as distressed managers per say. For example, Baupost has only approximately $6B of its >$20B invested in equities.
Personally, I think the distressed credit market has all of the hallmarks of an inefficient market: low liquidity, high transaction costs, downtrodden/out-of-favor securities, and significant complexity. The distressed credit market probably is one of the few markets where risk/return profiles can be significantly out of sync compared to other markets. As such, there's a greater probability that a truly successful manager can really outperform at equity level returns (as we can see with the above link) at potentially lower risk. So top value investors' taking heavy distressed credit positions really shouldn't be a surprise--true value investors in broad strokes take contrarian positions where price significantly diverges from business value, and these scenarios have a higher chance of playing out in the distressed credit market due to the market's structural inefficiencies.
My one caveat off the top of my head is the potential for the distressed market becoming more saturated as people catch on to the attractiveness of the risk-adjusted return of distressed credit. And as we've seen in strategies like private equity buyouts, convertible arbitrage, etc. in the past, more capital inflows usually drive down returns. Still, I highly doubt the distressed credit market will ever be as efficient as the large cap equity market due to its structural differences and inefficiencies. Returns may be driven down, but the possibility of long term outperformance still seems probable.
Side note: I'm really surprised by Centerbridge's (relatively) poor performance. Have heard they've been returning 20+% IRR from a few of their funds. Anyone have insight on this? Maybe the list is pretty flawed as mrb87 points out?
HF manager strategy:
1) start small firm, do deep diligence, have a concentrated portfolio, make market realistic/manageable trades -> crush your returns. Make money off performance fees.
2) take track record, raise a shit load of money, have returns drop but who cares because you relax and get rich off management fees.
3) retire