The 20-Year Performance Of Hedge Funds And The S&P 500 Are Almost Identical.

Hedge funds continued to underperform the overall US equity market this year. In the first six months of 2013, the S&P500 index is ahead of the CS Hedge Fund  Index by over 10%. That is not entirely unexpected during a bull market however - as was the case in the 90s. Just holding short positions – whether in long-short strategies or as risk-reducing positions – should result in  underperformance. The fact that the hedge fund universe includes credit, fixed income, and other non-equity strategies makes it difficult for a broad group of  hedge funds to outperform in a bull market. Here is what the CS Hedge Fund Index  breakdown by “sector” looked like over time.

HF Sector Weights

Over the past 20 years however (since the beginning of 1994), hedge funds (at  least as determined by the CS HF Index) and the S&P500 performance is nearly  identical through Q2 of this year. Both indices are showing about 8.6% in annual  returns.


SP500 vs hedge fundsSober Look
Source: CS


Of course if one stuck it out for 20 years in these investments  (reinvesting dividends and distributions), the path of achieving the 8.6% return  would have been dramatically different between these two. The monthly return  volatility for the S&P500 is nearly double that of the hedge fund index. And  while the correlation between the two indices is almost 0.6, the beta of  the hedge fund index has consistently been low – about 0.33 over the 20 year  period. In fact some portfolio managers view their hedge fund exposure as a  low-beta stock (over a long period).


HF Index vs SP500.PNGSober Look
12-month rolling window


An even more important consideration for risk-adjusted performance is  the maximum drawdown – the largest peak-to-trough decline. Drowdowns have  been considerably worse for various equity indices relative to hedge funds. For  example the Dow Jones World Index (global equities) still has not fully  recovered its 2008 losses.  All the media noise and the scandals aside (and  in spite of the high fees), the diversified hedge fund index still shows better  risk adjusted performance over the long term. The 8.6 % annual performance by  itself doesn’t tell one how scary the ride has been in the past couple of  decades.


DrawdownSober Look
Drawdowns (source:  CS)



Disclosure: This communication is for informational purposes only and nothing herein should be construed as a solicitation, recommendation or an offer to buy or sell any securities or product, and does not constitute legal or tax advice. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional investment, legal, tax, or accounting counsel.





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