How well hedge fund returns have met asset owners' expectations depends on to whom you're talking — or which report you're reading.
Research studies about whether hedge funds are still worth investing in have popped up like mushrooms since the beginning of the year when it became clear that 2015 hedge fund returns were below investors' expectations.
The problem for asset owners is that none of the studies from firms such as Mercer Investment Consulting, Cambridge Associates LLC, Markov Processes International Inc. and Agecroft Partners LLC, among others, reaches the same conclusions.
“All these studies about hedge funds are trying to get investors to set better expectations,” said Philip Zecher, chief investment officer of the $2.3 billion endowment of Michigan State University, East Lansing.
One recently released study — “Hedge Fund Reality Check,” by CEM Benchmarking Inc., Toronto — rattled institutional investors with its negative conclusions about the value-added characteristics of hedge funds, sources said.
Analysis of the hedge fund portfolio returns of a universe of more than 350 worldwide institutional investors over a 15-year period found that most of these portfolios did not deliver the benefits investors expected, said Alexander D. Beath, senior research analyst at CEM, who co-authored the hedge fund report with Michael Heale, principal.
The average net value added by hedge funds was -1.88% over the 15 years ended Dec. 31, compared with a customized CEM equity/debt index, Mr. Beath said, but pointed out that about 30% of the hedge fund portfolios in CEM's client database did outperform their customized CEM benchmarks.
“High costs are the main reason why hedge funds performed poorly,” Messrs. Beath and Heale wrote, noting in the report that in aggregate, hedge funds added a gross 0.97% of value over the CEM benchmarks for the 15-year span ended Dec. 31.
CEM analysis showed that average investment cost (management and performance fees) was 2.31% for portfolios of direct investments in hedge funds, which resulted in net added value of -1.66%, while the average hedge fund-of-funds fee was 3.56% (including underlying hedge fund manager fees and the hedge fund-of-funds fee) with net added value of -2.17%.
Clients of Cliffwater LLC, Marina del Re, Calif., asked so many questions about the CEM study that the specialist hedge fund consultant examined the study and issued a critique, said Stephen L. Nesbitt, Cliffwater's CEO.
“I'm not an apologist for hedge fund performance, but the methodology CEM used was so convoluted and flawed” that Cliffwater undertook a recalculation of the data, Mr. Nesbitt said.