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Costs mute hedge fund value added

Toronto-based benchmarking firm CEM Benchmarking released research on hedge fund returns, finding that net of costs, the asset class fails to add value over a traditional equity/bond portfolio. The research aggregated institutional portfolios with a hedge fund allocation history longer than five years and compared it to a custom equity/debt portfolio constructed from each plans' specific allocation.

From 2000 to 2016, all hedge funds added 1.45% over their respective benchmarks before fees. Direct hedge funds added 1.66%, while hedge funds of funds added 1.15%. After fees of 2.2% and 3.26%, direct and funds of funds, respectively, saw the value added fall below the break-even point, negatively impacting portfolios by a combined -1.27%.

Hedge funds of funds have been losing market share to direct hedge funds since 2007 according to data from Hedge Fund Research Inc., while the industry as a whole was impacted by vocal discontent surrounding the 2-and-20 fee structure many funds charge for their services.