“Important” contribution made to hedge fund performance debate

The primary trade association for hedge funds has produced evidence to show the industry can outperform equities and bonds over long and short-term periods.

The Alternative Investment Management Association (Aima) collaborated with data provider Preqin to show that hedge funds have out-performed equities and bonds on a risk-adjusted basis over one, three, five and 10-year periods.

Aima said the research was important in the context of the debate on hedge fund performance. Hedge funds have recently boasted a period of strong returns, with about 32% of them producing double-digit returns in 2017 – but over the years have been criticised for their fees.

The research found that the risk-adjusted returns, represented by the Sharpe ratio, of more than 2,300 individual hedge funds that report to Preqin’s All-Strategies Hedge Fund Index was higher over each timeframe.

For example, in 2017, the hedge funds Sharpe ratio was 0.65, ahead of 0.4 for the S&P 500 equity index and 0.18 for the Barclays Global Aggregate bond index. Over 10 years, hedge funds’ Sharpe ratio was 0.73, compared to 0.41 for equities and 0.13 for bonds.

The risk-adjusted return as measured by the Sharpe ratio is calculated by subtracting the risk-free rate (typically the return on US treasury securities) from the fund or index performance (returns, net of fees) and dividing this by the fund or index’s volatility. The higher the ratio, the better the risk-adjusted return.

The study found that the value of hedge fund performance gains in 2017 was around $250 billion net of fees. Net inflows are excluded from this data.

Jack Inglis, chief executive of Aima, said: “We already knew that 2017 was a good year for hedge funds, with 11% returns for the average fund and gains in every month of the year. But this new research makes an important contribution to the debate about hedge fund performance over the long-term since it shows that hedge funds have produced consistent and competitive returns for the last 10 years.”

Amy Bensted, head of hedge fund products at Preqin, said hedge funds “have proved their value” over both the short and longer term.

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