Hedge funds struggle against equities as investors look for stability rather than outsized returns

Jasper Jolly
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S&P 500 Flirts With Record High
The S&P 500 outperformed hedge funds over the course of 2016 (Source: Getty)

Hedge funds struggled to keep pace with equity markets over the course of 2016, with an average return significantly lower than benchmark indices.

Average hedge fund returns for 2016 hit 7.4 per cent over the course of 2016, according to data from Preqin and the Alternative Investment Management Association (Aima).

That performance was the highest annual return since 2013, but was still not enough to beat benchmark equity indices.

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London’s FTSE 100 gained over 14 per cent in 2016, while the US’s main benchmark S&P 500 gained 9.84 per cent before dividend reinvestments.

However, on a risk-adjusted basis hedge funds outperformed both equities and bonds over the year, meaning they tended to have lower volatility. Similarly, risk-adjusted returns on both a three-year and five-year basis beat stocks.

The average Sharpe ratio, which is widely used by institutional investors as a measure of risk-adjusted returns, was 1.45 for hedge funds. This compares favourably to the Sharpe ratios of the S&P 500, at 1.1, and bonds.

The figures underline the movement of the hedge fund industry from mysterious and even glamorous outsiders to a more staid mainstays of the investment industry.

While the hedge fund industry is often associated with massive returns, many funds now focus on avoiding a correlation with equity indices to provide portfolio diversity for institutional investors.

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Hedge Fund Research (HFR) recently reported hedge fund industry capital passed $3 trillion for the first time at the end of last year, despite the industry suffering some outflows as investors withdrew money. Investors redeemed $70.1bn during 2016, according to HFR.

Figures from Aima/Preqin show a similar increase of $120bn over the course of 2016.

Aima chief executive Jack Inglis said: “2016 was one of the better years for hedge funds since the financial crisis. Even though the headline numbers may not have met all investors’ expectations, our analysis highlights the importance of explaining various strategies and timeframes for yielding returns to clients.”

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