Recently, hedge funds have had a testing time. Since the debacle of 2008 and the bounce-back year of 2009, returns have been dull and many have written off hedge funds. That said, the performance experience from January 2010 to date has matched the main expectation of clients which are two-fold: i) dampen volatility in tough times and ii) generate consistent returns.
Volatility dampening
Over this recent period, hedge funds have protected considerably when equities have faced headwinds. In the months of January 2010, May 2010, August 2010 and August 2011, the MSCI World Index had total returns of -25.28%. During these months, hedge funds’ performance was -4.91% (as measured by HFRI Fund of Funds Composite).
So although correlation between equity and hedge funds has been 0.90, the protective features of hedge funds have been very strong.
The same can be said for the protection against bond headwinds (as measured by Citi World Government Bond Index). The headwinds have not been many (bonds have done well – but for how long still?), nevertheless in the months of March 2010 and November 2010, bonds suffered a total return of -6.48%. During these months, hedge funds’ performance was +1.56%.
Consistent returns
Over the near two-year period, hedge funds have produced the same return as equity at +3.7%. Hedge funds, though, have done so with low volatility, at 4.6%, and positive months 60% of the time (same figures for equity are 17.70% and 45%, respectively). For hedge funds, these figures are both lower than long-term ones (from January 1990 to December 2009 volatility was at 6% and positive months at 71.25% of the time), reflecting the challenging environment.
The hedge fund world has matured and institutionalised significantly since 2008. Transparency, liquidity, and investor control have all been much enhanced. If hedge funds can continue along a similar performance path as that described above, clients should regain their confidence to place hedge funds in their portfolios.
