Hedge fund investors have not missed the boat, according to a new paper by Kent A. Clark.
As managing director and chief investment officer of the hedge fund strategies group at Goldman Sachs Asset Management, New York, which manages $14.8 billion in hedge funds of funds, Mr. Clark has something of a vested interest in proving his point. But his data do realign expectations about hedge fund returns.
"The main complaint about hedge funds seems to be that recent returns have been ‘disappointing,' which, in investment parlance, is a euphemism for ‘bad,' " Mr. Clark wrote.
To gauge just how disappointing hedge fund returns were, Mr. Clark found that the CSFB/Tremont Hedge Fund index returned an annualized 7.2% with volatility of 5.2%, compared with an annualized -1.7% for the MSCI World index with 15% volatility, from 2000 through the end of July 2005.
"Although absolute returns for hedge funds were higher in 2003 and 2004 than they were from 2000 to 2002, disappointment seems to have taken hold in 2004. One explanation is that investors are implicitly comparing hedge funds to equity markets," Mr. Clark wrote.
Arguing that it would be more accurate to judge hedge fund managers by the amount of active risk or asset class risk they take, he looked at returns generated by hedge funds in 2004 and the annualized returns generated by hedge funds in excess of the 90-day U.S. dollar LIBOR rates for the 10 years from January 1994 to December 2004. Only two of 10 common hedge fund strategies significantly underperformed their historical averages — convertible arbitrage and global macro.