Anoj Hedge funds performance

8/14/2019 Anoj Hedge funds performance

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Hedge Funds Performance

Exhaustive and complete data on hedge funds are impossible to obtain. But the imperfect available

data concludes that hedge funds have been very successful in the 1990s.

Why is it difficult to obtain information about the performance?

Hedge funds are pirvate partnerships and corporations which are sold through private offerings of

security. They are subject to no direct regulations beyond the basic security regulations. They are

not required to report to any public regulator and not allowed to publically advertise and promote

their funds. As a result, no concrete source of exhaustive audited data on hedge funds performance

or asset management exists.

Some organizations specialise in gathering and selling data on hedge funds, thereyby advicing and

helping potential investors to select the right fund.

Data is gathered by surveying the find managers which might result in added systematic

imperfections in the collected data.

Definition of universe

Depending on the organization, they may chose to exclude finds that do no use leverage or shor-

selling. Some include managed futures funds etc. Hence, distinctions between them are quite

blurred.

Completenes of universe

Since there is no single, exhaustive uniform source for benchmarking these funds,

it is not possible to capture all funds in the sureveys.

New funds are added frequently and vendors become aware of them only through word of

mouth.Hence the database is not complete.

Participation in surveys is prely voluntary and some fund managers chose not to participate for two

reasons either they fared poorly or have enough investments and thereby not interested to promote

or advertise their funds.

Omission of these two groups leads to over or understating of average performance respectively.

Over the time, many funds are dropped when they cease to exist, which inturn causes historical

performance that now reflects only the good funds that still survive to overstate past performance.

With all these, it's been observed that a net overstatement (mainly due to overstated historical

results) of average performance of the group.


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Exhibit3. Risk/Return Performance as a class over time

Group Analysis

Here we compare several major performance benchmarks during the 1990s and estiamte the

risk/return performance of the Hedge funds.

Results 142 funds from the MAR database are taken as a group, as well as divided into segment

subgroups.

For the hedge fund universe and segments, monthly fund returns are averaged on equal-weighted

basis, and their gemorteric averages and standard deviations are calculated across time.

Results are multiplied by 12 and (12)to convert them to annual-equivalent basis. Benchmark used

are the S&P 500 (exhibit 3), Russell 2000, MSCI EAFE, MSCI Emerging markets index and the

Lehman US Bond index. All hedge funds returns are net of fees.

The data supports the assertion that hedge funds have exhibited strong risk/return performance

during 1990s. They have outperformed all benchmarks except the S&P 500, and at lower risk than


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all benchmarks but the Lehman US Bond index. Furthermore, ratio of return to risk is clearly higher

for the hedge fund universe than others.

Segmented Analysis

Macro funds turned in highest return, while funds of funds exhibited lowest return. This is a

contradiction to the fact that funds of funds seek to select funds that will turn in the strongest

performance.

Average return and standard deviation through time of the average monthly return across all funds in

each category using an equal- weighted investment in 142 hedge funds simultaneously.

Such an Hypothetical investment enjoys significant diversification, especially in hedge fund

portfolios which are largeley uncorelated to one another.

Exhibit4. Risk/Return Performance on average over time

This represents the risk and return experienced by the average fund in each class, rather than by the

class as an aggregate. We observe that the average returns are unchanged but risk estimates are

significantly increased (graphically, all hedge funds point shift to right, leaving benchmark pointsfixed)


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We observe that the set of feasible portfolios is expanded significantly when hedge funds are

available. It increases the portfolio return by as much as 200 basis points.

Both frontiers terminate on the right in the single highest return asset, the S&P 500. The left

terminates at different points which are the portfolios withe the least risk under the respective

assumptions.

Important conclusion for the above exhibit is that the average hedge funds seems to have lower risk

and higher returns compared to other benchmarks except S&P. The returns are closer to the S&P

and even though they are not highly corelated.

This is a powerful combination as it enables investor to lower risk significantly without degrading

return by forming a portfolio combining hedge funds and the S&P.

Exhibit6. Performance of Hedge funds during the down quarters of S&P

Hedge funds have continously outperformed the S&P during the poor quarters which further

strengthens our argument of the consistent and low corelated performance of Hedge funds compared

to the S&P

Conclusion

We have looked at various exhibits that compares the hedge funds as a group and as an average,


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against major benchmarks. Even with an incomplete and a conservative estimation, Hedge funds

seem to have outperformed major benchmarks (except S&P) by giving consistent high returns for

lower risks even in low quarters.This is a powerful combination as it enables investor to lower risk

significantly without degrading return by forming a portfolio combining hedge funds and the S&P.

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Anoj Hedge funds performance