A new study out of the U.K. is trying to resolve any confusion about the value of hedge funds, concluding that they have undoubtedly outperformed stocks, bonds and commodities.
Put together by the Centre for Hedge Fund Research, in collaboration with KPMG and the Alternative Investment Management Association, the Centre studied hedge fund performance from January 1994 to October 2011 using its comprehensive database and found that these funds put up an average annual return of 9.07 per cent.
In comparison, stocks returned 7.18 per cent, bonds returned 6.25 per cent and commodities returned 7.27 per cent. Hedge funds win.
The study also found that hedge funds had significantly fewer fluctuations than the average person probably assumes. According to the results, hedge fund returns had considerably less volatility and value-at-risk than stocks and commodities, and were pretty much on par with bonds.
To get an idea of how they performed, when their returns are compiled, there were only three years of losses: 2002, 2008 and 2011. 2008 was by far the worst with an average 20.5 per cent loss. But then keep in mind that the funds gained almost all of that back the next year, returning 18.6 per cent.
Of all the hedge fund strategies studied, the Centre found that equity hedging performed the best, with an annual mean return of 10.58 per cent, followed by event driven investing at 10.32 per cent and emerging markets investing at 9.6 per cent.
There was also an interesting data point. For the most part, hedge fund correlations to stocks and bonds stayed relatively the same during recessions and outside of recessions. But with commodities, hedge funds had only a slightly positive correlation outside of recessions yet a relatively strong one during recessions. However, this might be easily explained by the fact that the force of the Great Recession skewed the results.
As a word of warning, the language in the report is at times pretty pro-hedge fund, and there’s no word on how the Centre for Hedge Fund Research is funded. That being said, the results are at least an interesting data point to keep in mind.
And in case you’re worried that the study didn’t account for hedge fund performance fees, have no fear. The study assumed that hedge funds charge on average a 1.75 per cent management fee and a 17.5 per cent performance fee. Aggregate hedge fund annualized gross returns were 12.61 per cent, which left 9.07 per cent for the investors.