Harriet Davies
Editor - Family Wealth Report
25 April 2012
Feature
Risk-adjusted returns
The Sharpe ratio – a measure of risk-adjusted performance – is 0.76 for hedge funds for the examined period, compared to 0.23 for global stocks, 0.68 for global bonds and 0.16 for commodities. Meanwhile, the standard deviation of performance, at 7.2, is higher than for global bonds but lower than for equities and commodities, the study claims.
Other asset classes are measured using the MSCI World Total Return Index for global stocks, the JP Morgan Global Aggregate Bond Total Return Index for global bonds, and the S&P GSCO Commodity Total Return Index for commodities, all between January 1994 and October 2011.
Correlations between hedge funds and other asset classes are shown to rise during recessions in the report, but “only slightly,” the authors say, “suggesting that hedge funds do not threaten the stability of the financial system.”
Using regression analysis of hedge fund excess returns against the excess returns of other asset classes, the authors of the report find that “most of the hedge fund performance is explained by alpha, not beta (that is exposure to systemic risk).” They estimate that around 76 per cent of hedge fund performance is due to alpha.
