Mutual Funds Outperformed Hedge Funds In 2004

by Phillip Morton, Investors Offshore.com

03 January 2005

As the investment industry reflects on performance figures and returns for 2004, data reveals a rather disappointing year for hedge funds, which were generally outperformed by their more conventional mutual fund cousins.

According to fund tracker Morningstar, mutual funds returned an average 8.35% during 2004, outshining major hedge fund indices such as the CSFB/Tremont index, which returned 7.9% in the year to the end of November, and the Hedge Fund Research Index, returning 7.19% over the same period, the Financial Times reveals.

The data paints a rosier picture for mutual funds than would have been expected earlier in the year when the industry was rocked by scandal and struggling to recover from the bear market.

Some also believe that mutual funds will continue to recover at the expense of hedge funds in 2005 as investors are turned off by the latter’s hefty performance fees, which are typically charged at 2% of assets and 20% of returns. By contrast, the average mutual fund manager charges 1.4%.

The FT reported Russ Kinnell, director of mutual fund research at Morningstar, as noting: "2004 proved to be a pretty darn good year in the end. We had a strong finish, which is exactly what the mutual fund industry needed.”

Real estate proved to be the most fruitful investment last year, with property-based mutual funds returning an average of 30% - triple the return from the S&P 500 – while natural resources, utility and communication funds also performed well.

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