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Hedge Funds

Hedge funds produce higher risk-adjusted returns than equities, bonds – research

Hedge funds delivered more consistent returns than equities or bonds over the short and long term, says new research by data provider Preqin and the Alternative Investment Management Association.

The two organizations looked at hedge fund performance relative to equities and bonds on a risk-adjusted basis over one, three, five and 10 years. Preqin and AIMA used the Sharpe ratio to represent risk-adjusted returns across more than 2,300 individual hedge funds, with a higher ratio showing a better gain.

The Sharpe ratio of hedge funds reporting to Preqin's All-Strategies Hedge Fund index in 2017 was 0.65, vs. 0.4 for the S&P 500 and 0.18 for the Bloomberg Barclays Global Aggregate Bond index.

Over three years, the Sharpe ratio for hedge funds was 1.37, compared to 0.98 for equities and 0.09 for bonds. Over five years, hedge funds delivered a 1.58 Sharpe ratio, vs. 1.46 for equities and -0.24 for bonds. And over 10 years, these hedge funds' Sharpe ratio was 0.73, vs. 0.41 for equities and 0.13 for bonds.

In monetary terms, the value of hedge fund performance gains in 2017 was about $250 billion, said Preqin and AIMA. Calculations were net of all fees and excluded net inflows to strategies.

Performance in general was better for hedge funds in 2017, with about 32% of those in the sample producing a double-digit return, up from about 23% in 2016. Calendar-year 2017 hedge fund returns were 11.49%. The three-year annualized return was 7.01%; five years, 7.77%; and the 10-year period through 2017, 7.21%.

"We already knew that 2017 was a good year for hedge funds, with 11% returns for the average fund and gains in every month of the year," said Jack Inglis, CEO at AIMA, in a statement accompanying the data. "But this new research makes an important contribution to the debate about hedge fund performance over the long term since it shows that hedge funds have produced consistent and competitive returns for the last 10 years."