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Hedge funds outperform on risk-adjusted basis in 2016, longer periods — study

On a risk-adjusted basis, 2016 hedge fund returns were better than those of equities and bonds, new research shows.

In the year ended Dec. 31, the risk-adjusted return expressed by the Sharpe ratio of the hedge funds in the Preqin All-Strategies Hedge Fund index was 1.45.

By comparison, the Sharpe ratio for the S&P 500 Total Return index was 1.1; MSCI World U.S. Total Return index, 0.68; and Barclays Global Aggregate index, 0.2, according to the results of a joint study by Preqin and the Alternative Investment Management Association, released Tuesday.

On an absolute scale, the Preqin index returned 7.4% in 2016.

The Sharpe ratio of the Preqin All-Strategy Hedge Fund index also was higher than the ratios of major market indexes at 0.97 for the three years ended Dec. 31 and 1.49 for the five-year span.

Over the three-year period, the Sharpe ratio of the S&P 500 index was 0.74; MSCI World index, 0.31; and Barclays Global Aggregate index, -0.23. Over the five years ended Dec. 31, Sharpe ratios were 1.29 for the S&P 500 index, 0.87 for the MSCI World index, and -0.23 for the Barclays Global Aggregate index.

“2016 was one of the better years for hedge funds since the financial crisis,” said Jack Inglis, AIMA CEO, in a joint news release, adding that “on average hedge funds outperform(ed) on the key metric of risk-adjusted returns over one year, three years and five years.”

“As markets responded to the unexpected events of 2016, hedge funds were able to show their worth and generate their best returns for three years,” said Amy Bensted, Preqin’s head of hedge fund products, in the release.

But investors are “looking for hedge funds to produce more than high returns,” Ms. Bensted said, stressing that “this study shows hedge funds have delivered solid risk-adjusted returns over the short and longer terms, a facet of hedge funds that is highly prized” by institutional investors.