Perhaps this is why so many hedge fund managers are cozying up to Donald Trump: The hedge fund industry’s run under Barack Obama has been terrible.
On Monday, investment analytics firm Hedge Fund Research reported that the private investment firms as a group returned 5.6% in 2016. While that was hedge funds’ best showing in three years, it was still only about half as good as the S&P 500, which rose 9.5% last year.
More importantly, that marks the eighth year in a row that hedge funds have underperformed the broader market, as measured by HFR’s fund-weighted composite index—the same eight years during which Obama served as President. And dismal returns were only one of a slew of disasters that hedge funds have faced recently.
While some hedge fund managers might be tempted to say, “Thanks, Obama” for that period of disappointment, the outgoing President, who gives his farewell address Tuesday, isn’t entirely responsible for their continued failure to beat the market.
The last time hedge funds outperformed was 2008, when they lost 19% compared to the S&P 500’s 38% decline. Since then, though, many hedge funds have been overly bearish, focusing so much on protecting the capital they have through trendy so-called market neutral strategies to the point of sacrificing more impressive investment returns.
On the flip-side, as the number of stock-picking hedge funds has multiplied, some of those managers have tried to differentiate themselves by making big, risky bets, some of which have turned out catastrophically, from Bill Ackman’s investment in Valeant (vrx) to David Einhorn’s stake in now-bankrupt SunEdison.
Magnifying the damage: The tendency of copycat hedge fund investors to follow each other into the same stocks, a dangerous phenomenon known as crowding that can lead to massive losses when they all try to dump their shares at the same time. Even billionaire trader Steve Cohen last year lamented the tendency of other hedge funds to coalesce around certain stocks, dubbed “hedge fund hotels” when the industry holds a disproportionate amount of their shares.
Indeed, Obama himself has had little direct impact on hedge funds’ lagging performance, other than by perhaps crimping returns of Fannie Mae (fnma) and Freddie Mac (fmcc)—two hedge fund favorites—and by opposing merger and tax inversion deals on which hedge funds bet big. The Justice Department under President Obama has also aggressively gone after traders who have tried to make money off of non-public information. But it’s unlikely that the crackdown on insider trading alone accounted for hedge funds’ recent underperformance, just as it’s unlikely that illegal trades were the primary driver of of hedge funds’ outperformance pre-Obama.
Overall, Obama has introduced few regulations that have specifically impacted hedge funds.
Will Donald Trump’s presidency be any better for hedge funds? Only time will tell, but the President-elect’s circle of advisors includes hedge funds managers from Carl Icahn to John Paulson to Anthony Scaramucci. A number of them, it appears, are betting on it.