Treat Me Right

#leaders #investors

A look back at our year in returns. Making sense of the trends and ideas for fair play in compensation.

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Impossibly, the year-end process for hedge funds is here. Since last year, we’ve waded through Fed rate cuts, a Middle East re-alignment, an election, compelling evidence that AI will indeed be transformative sooner rather than later and, of course, another high 20s percent gain in the S&P 500. The strong market will create a tailwind of expectations for everyone hoping to get paid well this year. But who’s really earned it?

Stocks mostly go up.

First, let’s own it: it has not been very difficult to make money in the stock market lately. Over the last 20 years (since before Obama, when a guy named Bush was president), the average annualized market return has been 9.3%, but it has posted positive results in 17 of 20 years.

Even accounting for a rough 2022, the last four of the past five years have been high double-digit returns. It is not unreasonable, therefore, to post a healthy positive return in a market neutral long/short book.

Sectors matter, too.

Most long/short teams approach the market with a focus on a sector following a coverage model that allocates a group of stocks within that sector to be split among members of the team and, ultimately, managed by the PM. Here, the sector spreads as measured by ETF returns have some variability. For example, Financials posted an unusually strong year (we love the Fed, We Love The Fed!, WE LOVE THE FED!), while the more traditionally strong healthcare space posted a weaker than normal result.