Top Hedge Funds Are Hiding and It’s Warping Return Data | Jon Caplis of PivotalPath

Episode Summary

Executive Summary: John Kaplis argues hedge fund databases badly underrepresent the industry because many high-quality, billion-dollar-plus managers refuse to share data, while commercial lists also include non-institutional vehicles and duplicate listings. Pivotal Path’s fuller coverage and better benchmarks, he says, materially change asset-allocation decisions and help explain why hedge funds remain underowned despite strong recent performance and rising demand for liquidity.

Main Topics: Pivotal Path’s differentiated hedge fund coverage (Priority: 5/5): Kaplis explains that Pivotal Path serves institutional LPs by covering 3,000+ hedge funds, avoiding approved lists, and providing complete data plus benchmarks designed for allocator decision-making. Why commercial hedge fund databases are incomplete (Priority: 5/5): He argues hedge funds have no regulatory obligation to share data publicly, so large managers often opt out of commercial databases due to limited upside and meaningful downsides such as loss of narrative control and competitive intelligence risk. Bias in benchmarks and sample construction (Priority: 5/5): The interview emphasizes that databases both miss key contributors and include noise such as feeder funds, managed accounts, and drawdown vehicles, creating distorted returns and misleading counts of hedge funds globally. Underinvestment in hedge funds and allocator behavior (Priority: 4/5): Kaplis says poor data and artificially low benchmark performance can cause boards and investment committees to reduce hedge fund allocations, even when the underlying industry is performing better than perceived. 2025 performance and strategy dispersion (Priority: 4/5): He reviews year-to-date strategy results, highlighting strong results in equity quant, credit, and global macro discretionary, and weak results in managed futures, with wide dispersion across manager sizes. Industry evolution: transparency, SMAs, and institutionalization (Priority: 3/5): Kaplis says hedge funds are becoming more transparent, more willing to offer separately managed accounts, and more like durable firms with succession planning and external partnerships. Industry trends: consolidation and multi-strat growth (Priority: 3/5): He points to M&A, fund combinations, and the continued rise of large multi-strats as firms deepen capabilities and broaden strategy exposure, while the hedge fund industry itself institutionalizes.

Key Arguments: Commercial hedge fund databases are structurally incomplete because funds are not required to provide data, and the largest/highest-quality managers often choose not to participate. The problem is not random missingness: the funds absent from databases tend to outperform by a wide margin, so benchmarks and allocation models are biased downward. Many databases also overcount because they include funds of one, managed accounts, redundant share classes, feeder funds, and other vehicles that are not institutional-quality hedge funds. Better data changes capital allocation decisions: a 400 bps performance gap can be the difference between a sizable hedge fund allocation and none at all. Hedge funds are sold, not just bought; managers need to communicate strategy, peer group, and edge clearly, and inaccurate database data can destroy credibility. Liquid hedge fund strategies are benefiting from renewed demand for liquidity as private equity distributions slow and allocators value flexibility more highly. The industry is becoming more institutionalized through separate accounts, improved transparency, and succession planning, making firms more durable over time.

Data Points: Institutional LP capital served by Pivotal Path: over $500 billion - Kaplis says Pivotal Path works with institutional LPs that collectively invest actively in hedge funds. Hedge funds covered: over 3,000 - Pivotal Path’s hedge fund universe coverage. Hedge fund capital represented: over $3 trillion - Kaplis says the coverage represents the majority of institutional-quality hedge fund capital globally. Firm age: founded in 2013 - Pivotal Path was founded in 2013; interview is around its 12-year anniversary. Performance gap for Pivotal Path-exclusive funds: over 4% more per annum - Funds exclusive to Pivotal Path outperformed other covered funds over 2013-2022. Alpha portion of performance gap: almost 4.5% - Kaplis says most of the outperformance came from alpha over the 2013-2022 period. Evaluation period: 2013 to 2022 - Period used for the performance comparison of exclusive funds. Global hedge fund industry size (Pivotal Path estimate): a little over $3 trillion - Kaplis contrasts his estimate with larger public estimates. Public estimate of hedge fund count: 30,000 globally - He cites Preqin’s stated number, which he says is about an order of magnitude too high. Pivotal Path/IPC estimate of true hedge fund count: roughly 3,000 - He cites academic and client studies suggesting the true count is far lower. Composite year-to-date return: over 2% - Pivotal Path composite return through May 2025. Composite volatility: about 3% annualized - Point of reference for diversified hedge fund portfolio risk. S&P 500 volatility: about 16.5% annualized historically - Comparison used to highlight hedge fund smoothness. Funds positive year to date: 66% - Share of funds in the Pivotal Path universe with positive returns through May 2025. Positive funds’ performance: up about 6.2% - Average gain among positive funds through May 2025. Negative funds’ performance: down about 7% - Average decline among negative funds through May 2025. Equity quant year-to-date return: 7.4% - Best-performing strategy through May 2025. Equity quant three-year annualized return: over 11% - Evidence of persistent strength in equity quant. Equity quant five-year annualized return: close to 10.5% - Evidence of multi-year outperformance. Credit manager returns: 6-7% per annum - Kaplis describes credit hedge fund performance as strong and competitive with private credit. Multi-strat year-to-date return: about 2% - Multi-strategy hedge funds’ performance through May 2025. Managed futures year-to-date return: down over 10% - Worst-performing strategy through May 2025. Managed futures one-year return: down about 15% - Reflects a difficult recent period after a strong 2022. Global macro quant year-to-date return: flat - Compared with weaker managed futures performance. Global macro discretionary year-to-date return: up over 7.5% - Strong discretionary macro performance through May 2025. Large funds cohort performance: down 2.7% - Funds $5 billion and above were the only size cohort down year to date. TMT correlation to Goldman Sachs VIP Long/Short and Nasdaq: 0.93 and 0.92 - Kaplis cites very high correlation for sector-focused TMT hedge funds. TMT correlation period: last 18 months - Time window for the correlation comparison.

Pivotal Quotes: "Funds in commercial databases results in a substantial overcounting of institutional quality funds, and perhaps more importantly, a biased view of historical hedge fund risk and returns." — John Kaplis: He cites academic work to explain why commercial hedge fund databases misrepresent the industry. "400 basis points can easily be the difference between a model arguing for a significant allocation to hedge funds in general or zero." — John Kaplis: He explains why undercounting high-performing funds can materially distort asset-allocation decisions. "Hedge funds are sold much more than they are just bought." — John Kaplis: He describes why communication and narrative matter as much as performance in fundraising.

Implications: For allocators, better data can materially change portfolio construction, benchmark choice, and hedge fund allocations. For managers, transparency, clear messaging, and institutionalization are increasingly decisive. For the industry, liquidity and strong recent returns may drive renewed inflows.