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Pity the unfortunate institutional investor. While small investors have been doing just fine this year with funds that track major indexes, many of the pros who try to beat these indexes are struggling with weak returns.

Take hedge funds, for example. These loosely regulated, swift-moving investment vehicles can chase momentum, hedge currencies, short-sell stocks and bet on mergers – to name just a few of the less-exotic methods for generating returns.

Yet, according to a Goldman Sachs report on 777 hedge funds with a combined market exposure of $1.9-trillion (U.S.), the benefits are hard to see: Overall, the funds have lagged the S&P 500 by 2 percentage points this year, through mid-May, with a return of zero. So-called long/short funds and macro funds have underperformed the benchmark (not to mention gold and bonds) by even more.

When Goldman Sachs looked at the 50 stocks that appear most frequently in the top 10 holdings of "fundamentally driven" hedge funds, the returns are downright bleak: They lagged the S&P 500 by 5 percentage points between March and April – or the worst monthly return outside the crisis periods of 2002, 2008 and 2011. For the year-to-date period, these stocks have also lagged.

What has gone wrong? Goldman Sachs blames poor market-timing: "Funds kept pace with the market through March, but lowered net exposure in early April just before the S&P 500 rebounded," the report noted.

Michael Hartnett, chief investment strategist at Bank of America, looked at a similar trend among institutional investors, where money managers have raised cash levels to 5 per cent of their assets, which is relatively high and suggests that the pros aren't as fully invested as they should be in an environment where stocks are moving higher.

"Individual investors are doing fine," he said in a note. "But institutional investor performance in 2014 has been horrid."

Apart from high cash levels, institutional investors have been also hobbled by specific bets on the global economy – particularly stronger U.S. growth and rising bond yields – that haven't paid off.

As Mr. Hartnett explains: "Very simply, portfolios were positioned, in an extreme way, for higher [economic] growth, higher [bond] yields, higher [U.S.] dollar, and that backdrop is yet to transpire. Portfolios were also positioned for sub-7 per cent China GDP and that also didn't happen. Investors long small-cap, technology and banks and short gold, government bonds and emerging markets have been hammered."

Indeed, the U.S. 10-year bond has rallied, sending the yield down to 2.6 per cent from 3 per cent at the start of the year; the U.S. dollar index has drifted sideways; the U.S. economy expanded by just 0.1 per cent in the first quarter; gold has risen about $100 an ounce; and emerging market stocks have rallied 16 per cent since February.

But Mr. Hartnett expects things should get very interesting over the next several months, as ultra-low interest rates "induce asset manias" and stocks hit new highs in the summer – before things turn rocky.

"When the end of zero rates is threatened, likely this autumn as unemployment rates drop to uncomfortably low levels, both credit and stock markets should correct sharply," he said.

It's a refreshingly bold and specific forecast. But whether markets play along this time is another matter.

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