By Simon Miller
Hedge funds have significantly outperformed traditional asset clases such as equities, bonds and commodities over the last 17 years according to research from the Centre of Hedge Fund Research at Imperial College London.
The report, The Value of the Hedge Fund Industry, Markets and the Broader Economy, found that hedge funds returned an average 9.07% per annum after fees between 1994 and 2011 compared with 7.18% for global stocks, 6.25% for global bonds and 7.27% for global commodities.
In addition, it claims that hedge funds achieved these returns with considerably lower risk volatility as measured by Value-at-Risk than either stocks or commodities and said the research also demonstrated that hedge funds were significant generators of 'alpha', creating an average of 4.19% per year since 1994.
“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, CEO of report co-sponsor the Association of Alternative Investment Management Association.
The Centre of Hedge Fund Research also claimed that portfolios including hedge funds outperformed those comprising of a 60% stock and 40% bond portfolio. 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 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 which also co-sponsored the report.
The report can be downloaded here.