![]() Beta is a commonly used measurement that quantifies how closely an asset moves relative to the broader market or a specific index comparison. The last factor we look at to compare hedge funds and global equities is the beta. ![]() As mentioned above, this lower overall volatility experienced in hedge funds might be attributed to the diversification benefit that hedge funds are generally equipped to provide. It is also interesting to note that the highest volatility level was displayed in global equities during January 2011, when the MSCI ACWI index saw a return of 24.1%, almost three times greater than that of hedge funds over the same time. This is an average relative volatility difference of 8.6%, which is quite extensive. The volatility of hedge funds was consistently lower than that of global equites with an average of 5.5% in comparison to global equities which saw 14.1%. Using the same time period, we also looked at the volatility of hedge funds with respect to global equities. In addition, the lower dispersion in rolling 36-month returns of hedge funds should have helped dampen overall portfolio volatility. Because this is not an investable benchmark, this brings to light the importance of manager selection when building out a hedge fund portfolio. The exploration of this data leads us to believe that over a rolling 36-months, hedge fund investors may not have lost money if they held an initial investment in the HFRIFWCI, though it must be noted that this is not an investable benchmark. This downturn was -18.9% and -14.6% respectively. This compares favorably to global equities, which also experienced two periods of negative performance, but did so for both a longer period and to a much greater extent. In both cases negative performance reached a mere -1.4% and -0.2% respectively. The first dip was at the bottom of the Global Financial Crisis (GFC) in February 2009 and the second, at the depths of the pandemic in April 2020. Looking to the performance of hedge funds over the same time, we note that there were only two periods in which performance was overtly negative. ![]() As seen in the chart below, equities started emerging from the Dot-Com Bubble in the early 2000’s with a significant drag, lower than -15%. If we break down the returns into a rolling 36-month return series, we can see just how pronounced this performance dispersion was. These factors appear to have contributed to hedge funds’ ability to maintain returns through the end of Q1 2021, when global equity returns closed the lead on hedge funds due to the accelerated recovery from the depth of the pandemic.ĭispersion was a Factor Driving the DifferenceĪs mentioned above, the lower overall volatility in hedge funds seems to have accounted for the smoother performance trajectory in comparison to global equities. This advantage was generated in part from lower drawdowns in times of financial crisis, like the GFC of 2008, combined with a lower level of overall volatility of hedge funds relative to equities. The below chart however, highlights that for most of the observed period, hedge funds outperformed global equities. Over the past 22 years both hedge funds, as represented by the HFR Fund Weighted Composite Index (HFRFWCI), and global equities as represented by the MSCI All Country World Index (ACWI) returned almost 3.5 times their initial value. Below, we will investigate how hedge funds have performed versus the global equity markets since the turn of the century to highlight the potential for these benefits to be realized by investors. Given this, they may help to improve the return consistency of an overall portfolio, as well as provide protection against drawdowns in the broader market. Additionally, they may also allow investors to access a variety of uncorrelated returns through exposure to non-traditional or idiosyncratic risk factors, resulting in alpha. To start, they may have the ability to provide positive returns in both rising and falling equity and bond markets. Hedge funds have long been utilized by investors to seek to access and unlock several potential key benefits when creating a well-diversified portfolio.
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