Hedge funds outperformed equities and bonds on a risk-adjusted basis over the past five years, according to a paper released Monday by the Alternative Investment Management Association.
AIMA, which represents managers with a combined $1.5 trillion of assets, found that hedge funds — both as a whole and those operating equity hedge strategies — consistently outperformed U.S. equities, global equities and global bonds on a risk-adjusted basis, using the Sharpe ratio.
The risk-adjusted return of the HFRI Fund Weighted Composite was 1.28 for the five years ended Dec. 31. The HFRI Equity Hedge index produced a Sharpe ratio of 1.05 over the same period. In comparison, the S&P 500 Sharpe ratio was 0.95; the MSCI World was 0.68; and the Barclays Global Aggregate ex-USD was 0.38. (A higher Sharpe ratio equals a better risk-adjusted return.)
The same was true over 10- and 20-year periods.
“Many investors value getting steadier returns with lower volatility over higher returns with much greater volatility,” said Jack Inglis, CEO of AIMA, in a news release accompanying the paper. “Hedge funds actually have lower volatility not only than equities but also bonds. What that means is that in terms of the risk taken, i.e. in risk-adjusted terms, the industry continues to outperform.”
AIMA has produced five steps for hedge fund investors to follow, including to look at risk-adjusted returns. It recommends investors also consider long-term data, returns by strategy, comparisons with relevant asset classes and the differences between hedge fund indexes when investing.
The report is available on AIMA's website.