IMF Forecasts Accelerating Global Economic Growth in 2014 and 2015

On January 21, the International Monetary Fund (IMF) issued a positive update on its World Economic Outlook. In a press conference, Olivier Blanchard (Economic Counsellor and Director of the Research Department) stated the report had three main messages:

• The global economic recovery is strengthening, with accelerating growth in both the developed and emerging economies (see infographic below):

Source: IMF World Economic Outlook (WEO) Update: Is the Tide Rising?, January 2014 

• This increase in growth was anticipated. The drag from fiscal consolidation is diminishing; the financial system is slowly healing; uncertainty is decreasing.
• The economic recovery remains relatively weak and uneven, and risks are evident.

For the U.S., the IMF projects a rise in GDP from 1.9% in 2013 to 2.8% in 2014. Blanchard commented:

“U.S. growth appears to us to be increasingly solid. Private demand is strong. As a result of the December budget agreement, fiscal consolidation, which weighted on growth negatively in 2013, will be more limited in 2014.”

The IMF update is good news to global stock market investors. We pointed out in our October 1 and January 1 Outlooks that the world's stock markets rose every year this century when global GDP growth accelerated. We note that Marietta's forecast for 2014 global growth is 4.1% and for U.S. growth is 3.0%, and thus we think the IMF is still too conservative and will raise further estimates as the year progresses.

What is the Problem with Hedge Funds?

2013 was a miserable year for hedge fund relative performance. Bloomberg reports that only 16 large funds (those with assets over $1 billion) surpassed the Standard & Poor’s 500 Index as of October 31. Among the more popular approaches (asset backed, credit arbitrage, distressed, long/short equity, long-biased equity, merger arbitrage, equity statistical arbitrage), none provided an average return through October 31 of more than 11% (the S&P 500 had already surged 23.2% by this point).      

For the entire year, hedge funds on average reported a modest 7.4%, which paled in comparison to the 32.4% total return of the S&P 500 Index. These results are surprising. Despite vast intellectual resources, cutting edge technological capabilities, and headline-grabbing media exposure, hedge fund managers have saddled clients with mediocre or worse returns. 2012 was also a dismal year for hedge funds: an average return of 6.2% trailed a 15.9% gain by the S&P 500. The last time hedge funds outperformed the Index as a group was 2008. 

The persistent underperformance of hedge funds is in stark contrast to their continued popularity. Hedge fund clients poured in a net $71 billion as of the end of November, and, by the end of 2013 assets under management had risen to $2.01 trillion.

So, there are two perplexing issues. In addition to the relative underperformance surprise, there is the question of why investors still think hedge funds are such a promising investment. Compounding the paradox is that hedge fund clients pay hefty annual fees typically 2% to 3% of assets under management plus 20% of any returns. On the other hand, most investment advisory firms charge annual fees of roughly 1% of assets under management with no performance fees.