When it comes to consistent and steady returns, hedge funds are pulling their weight, according to research from the Alternative Investment Management Association (AIMA) and financial research firm Preqin.
Hedge funds “have outperformed equities and bonds on a risk-adjusted basis over one, three, five and 10-year periods,” the organizations said in a release. Risk-adjusted returns, represented by the Sharpe ratio, reflect the volatility of the returns as well as the returns themselves.
Preqin and AIMA say their analysis, which is based on the returns of more than 2,300 individual hedge funds, shows “the value of hedge fund performance gains in 2017 was around $250 billion.” The organizations add that “about 32% of all hedge funds produced double-digit returns in 2017, up from about 23% in 2016.”
“We already knew that 2017 was a good year for hedge funds, with 11% returns for the average fund and gains in every month of the year,” says Jack Inglis, CEO of AIMA, in the release. “But this new research makes an important contribution to the debate about hedge fund performance over the long-term.”
Amy Bensted, head of hedge fund products at Preqin, says such products are widely used in institutional portfolios, including in those of pension funds, endowments and sovereign wealth funds.
The Sharpe ratio is calculated by subtracting the risk-free rate (typically the return on U.S. Treasury securities) from the fund or index performance (returns, net of fees) and dividing this by the fund or index’s volatility, the release says. The higher the ratio, the better the risk-adjusted return.