Fund Returns

The shift caught some professional investors off guard. Among mutual funds that invest in large-cap growth companies, about eight out of 10 trailed their benchmark index this year, the second-highest proportion since at least 2004, data compiled by Chicago-based Morningstar Inc. show. About 82 percent of value funds lagged behind, compared with 63 percent in 2013. Of all the funds, 77 percent underperformed the market.

The HFRX Equity Hedge Index fell for a second month in April, the longest stretch in two years. The Global X Guru Index exchange-traded fund, which tries to replicate hedge fund holdings, is down 3.7 percent in 2014. Paul Tudor Jones, founder of the $13.6 billion Tudor Investment Corp., said on May 5 at the 19th annual Sohn Investment Conference in New York that macroeconomic investing is as difficult as he’s ever seen.

Momentum Reversion

The reduction in monetary stimulus by the Fed has made it difficult to predict both the economy and the market, according to Dan Morris, a global investment strategist at TIAA-CREF Asset Management in New York.

“That momentum reversion made it very tricky from a stock selector’s point of view,” Morris said by phone. The firm oversees $569 billion. “There is still enough uncertainty around the Fed. We’re going to have these bouts of volatility that are going to continue to make it challenging.”

While the fund performance may be a wakeup call for individuals about market volatility, deposits to mutual funds and ETFs that buy American equity haven’t stopped. After withdrawing $260 billion from equities during the four years through 2012, investors added $140 billion in 2013 and about $20 billion this year, data compiled by Investment Company Institute and Bloomberg show.

As investors regain confidence in the economy and equity inflows continue, funds that offer stable returns during market turmoil will stand out, according to Frank James, founder of Alpha, Ohio-based James Investment Research Inc.

Defensive Mode

“What really helps is if you don’t lose money in bad down markets, they’ll never forget and they stay with you,” James said in a phone interview. “We were in golden years before when we were trying to make money in an aggressive way and now we’re in a defensive mode.”