Hedge funds outperformed traditional asset classes over past 17 years

25 April 2012   Category: News, Global  

Hedge funds significantly outperformed traditional asset classes such as equities, bonds and commodities over the last 17 years, according to a new study by The Centre for Hedge Fund Research at Imperial College in London. The research, commissioned by KPMG, the international audit, tax and advisory firm, and the Alternative Investment Management Association (AIMA), the global hedge fund association, is the most comprehensive of its kind to date.

The report, entitled “The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy”, found that, per annum, hedge funds returned 9.07% on average after fees between 1994 and 2011, compared to 7.18% for global stocks, 6.25% for global bonds and 7.27% for global commodities. Moreover, hedge funds achieved these returns with considerably lower risk volatility as measured by Value-at-Risk (VaR) than either stocks or commodities. Their volatility and VaR were similar to bonds, an asset class considered the least risky and volatile. The research also demonstrated that hedge funds were significant generators of “alpha”, creating an average of 4.19% per year from 1994-2011.

“This research is powerful proof of hedge funds’ ability to generate stronger returns than equities, bonds and commodities and to do so with lower volatility and risk than equities,” said Andrew Baker, AIMA’s CEO.

Portfolios including hedge funds also outperformed those comprising only equities and bonds, The Centre for Hedge Fund Research concluded. The study showed that such a portfolio outperformed a conventional portfolio that invested 60% in stocks and 40% in bonds. The returns of the portfolio with an allocation to hedge funds also yielded a significantly higher Sharpe ratio (which characterises how well the return of an asset compensates the investor for the risk taken) with lower “tail risk” (the risk of extreme fluctuation).

The Centre for Hedge Fund Research has created a unique aggregate hedge fund and benchmark index database. The database represents a careful aggregation of all the current information from multiple leading sources about hedge fund performance globally. Survivorship bias is not a factor because both active and inactive funds are included.

“The most interesting point to come out of this research is that it disproves common public misconceptions that hedge funds are expensive and don’t deliver. The strong performance statistics, showcased in our study, speak for themselves,” said Rob Mirsky, head of hedge funds at KPMG in the UK.