Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Hedge funds flounder in boom year for markets
According to data compiled by specialist US investment firm Aurum, the median hedge fund returned 7.2 per cent over the 2023 calendar year compared to over 19 per cent for global equities while bonds rose 6.7 per cent. On an asset-weighted basis, the Aurum hedge fund universe was up 7.9 per cent last year.
“This compares to the mean figure of 8.5 per cent, suggesting that, on average, larger hedge funds have underperformed,” the study says.
Aurum tracks about 3,400 active hedge funds in its database, which saw total assets under management grow more than US$93 billion year-on-year to hit US$2.9 trillion as returns of US$187.5 billion “partially offset” net outflows of US$94.3 billion.
Equity long-short funds, which represent the largest share (20 per cent) of the eight main hedge strategies covered in the paper, reported the best asset-weighted performance of 11.5 per cent while quantitative managers “dragged down” the average after returning just 2 per cent over the 12-month period.
In general, the best- and worst-performing hedge funds of 2022 reversed direction last year as strong markets bolstered “more long-biased and/or historically higher beta strategies”. The gap between the best- and worst-performing funds also narrowed “dramatically” over the last few years.
“Dispersion now sits at a level more in line with levels observed pre-COVID,” the Aurum report says, with the multi-strategy sector now “well below” its 10-year average. “All other strategies apart from event and long biased are also exhibiting below average levels of dispersion relative to the last ten years.”
Traditional hedge funds have also outperformed listed alternative vehicles across all strategies over the five years to the end of 2023: over the 12-month period, however, listed macro and arbitrage funds ended ahead of their unlisted counterparts on average. While the sector represents a wide diversity of investment styles, hedge funds in total remain well below the global equity index over the five years to the end of 2023.
“Five year performance… for hedge funds now stands at 6.5 per cent, comfortably outperforming bonds (-0.4 per cent) but underperforming equities (+9.4 per cent) from a total return perspective, however, outperforming equities from a risk-adjusted perspective…,” the Aurum report says.
During the same period, hedge fund assets under management – as measured by Aurum – have remained more-or-less flat.
