Study: Hedge Funds Outperform Other Asset Classes

Apr 24 2012 | 8:40am ET

New research commissioned by KPMG and a hedge fund lobby group shows hedge funds have significantly outperformed equities, bonds and commodities over the last 17 years.

The report—The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy—was done by the Centre for Hedge Fund Research at Imperial College in London at the behest of the international tax firm and the Alternative Investment Management Association.

Looking at the period between 1994 and 2011, it found that hedge funds returned, on average after fees, 9.07% per annum compared to 7.18% for stocks, 6.25% for bonds and 7.27% for commodities (globally). The study also found that hedge funds achieved these results with considerably lower volatility than either stocks or commodities (but at a similar rate to that of bonds).

The report also claims that hedge funds were significant generators of the elusive “alpha,” creating an average of 4.19% per year from 1994-2011.

Measuring hedge fund performance can be a challenge due to their secretive nature. Those that participate in databases do so voluntarily; many don’t make performance numbers public. For the purposes of this study, the Centre for Hedge Fund Research said it created an 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.”

Andrew Baker, CEO of AIMA, called the research “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.”

Rob Mirsky, head of hedge funds at KPMG UK says the study does nothing less than disprove “the common public misconceptions that hedge funds are expensive and don’t deliver.”

The study says portfolios including hedge funds also outperformed those comprising only equities and bonds and yielded a significantly higher Sharpe ratio (which characterizes how well the return of an asset compensates the investor for the risk taken) with lower “tail risk.”

The report is the first of a two-part series on the state of the global hedge fund industry. Part two, to be released in May, will look at leading industry trends.


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