Research commissioned by KPMG International and AIMA measured performance, volatility and risk from 1994 to 2011.
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 network of Audit, Tax and Advisory firms, 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 percent on average after fees between 1994 and 2011, compared to 7.18 percent for global stocks, 6.25 percent for global bonds and 7.27 percent for global commodities. Moreover, hedge funds achieved these returns with considerably lower risk volatility (measured by Value-at-Risk (VaR)) than either stocks or commodities. Their volatility and Value-at-Risk 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 percent per year from 1994-2011.
"This research is powerful proof of hedge funds' ability to generate stronger returns than equities, bonds and commodities and with lower volatility and risk than equities," said Andrew Baker, AIMA's CEO.
Portfolios including hedge funds also outperformed those with more traditional asset allocations, The Centre for Hedge Fund Research concluded. The study showed that such a portfolio outperformed a conventional portfolio that invested 60 percent in stocks and 40 percent in bonds. The returns of the portfolio with an allocation to hedge funds also 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 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 do not deliver. The strong performance statistics, showcased in our study, speak for themselves," said Rob Mirsky, Head of Hedge Funds at KPMG in the UK.
Cumulative returns are significantly higher for hedge funds compared to the other main asset classes. Specifically, KPMG survey shows that a hedge fund investor, who invested in the hedge fund index in January 1994 and held that investment until December 2011, would have quintupled their investment even after fees. In contrast, the respective investor who invested in global stocks or bonds only tripled their investment.
The commodity investor would have obtained the lowest cumulative return, that is, over two times lower compared to one that a hedge fund investor would have earned. at the end of the 2008 during the recent financial crisis 2007 – 2009, while hedge funds and global bonds seemed to deliver quite steady returns compared to other asset classes.
The report also analyses correlations between an average hedge fund and conventional asset classes over business cycles. The overall findings suggest that hedge funds exhibit relatively low correlations with other asset classes even during recessions.
KPMG survey says that correlations between hedge funds and main asset classes are only slightly higher during recessions, suggesting that hedge funds are unlikely to threaten the stability of the financial system. Although there is evidence that hedge funds are affected by financial market stresses, there is no academic evidence that shows that hedge funds cause economic instability.
To sum up, KPMG survey demonstrates that hedge funds provide superior risk-adjusted returns even during recessions. Hedge funds provide economically important risk-adjusted performance that provides investors with diversification benefits even during the most difficult macroeconomic environments.
© 2017 KPMG Audit LLC, the Mongolian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.